It is important to increase the supply of gold to the market and reduce import levels. The government has recently announced an increase in the import duty on gold with a view to strengthen the external sector of the economy and shore up the value of the Indian currency. While the duty on refined gold used for jewelry has been hiked from four to six percent, that on gold dore used for industrial requirements, particularly in the refinery sector, has been raised from two to five percent. The government has taken this decision because our economy suffers from the highest current account deficit at 5.4 percent of GDP.
The problem with this policy is that it focuses solely on the demand rather than supply side economics. To that extent, such a policy change is unlikely to lower the demand for gold across the country, owing to the people’s psyche and ills of economic governance.
The traditional role of gold in Indian society is embedded as a culture of savings to meet family requirements like weddings or religious ceremonies. Besides, trading communities traditionally tend to invest in gold as a form of contingency fund to bail them out in case of potential business losses in the future. Also Hindu temples like Tirupati and Padmanabaswamy in Tiruvanthapuram are known to hold huge gold reserves. Similarly, other religious bodies also possess gold reserves. All this in a sense, suggests the centrality of gold to Indian life. Gold remains a primary investment across all socio-economic segments because of tradition, security and hedge against inflation drive demand. Acquisition of gold at this juncture, characterized by an uncertain economy, offers the investor capital appreciation unlike any other form of investment. Therefore, an enhanced demand for gold occurs when investments in real estate, stocks and shares, debt securities, besides mutual funds are unable to offset high inflation rates. Thus, gold continues to remain the most attractive form of investment.
The government’s inability to effectively curb the high inflation rate, besides other problems like low growth rate, unhealthy level of deficit finance and an alarming current account deficit has shattered people’s credibility in economic governance. Also the fact that internationally renowned credit rating agencies are contemplating to further lower the country’s investment grade, only reinforces such a line of thinking.
The country consumes 800-1000 tonnes of gold annually, which amounts to $38 billion or 20 percent of the global demand. The new measure is expected to decrease demand for gold by 10 percent. India imports gold worth over $35 billion largely from South Africa and the US for domestic consumption. Today, gold comprises 10-15 percent of India’s imports. This policy aims to reduce the widening trade and current account deficit to eventually strengthen the rupee. Today, the external value of the Indian rupee has declined in relation to the dollar, which is also India’s trading currency.
Whether adoption of such a policy would address the problem or not is improbable as this approach only tackles the symptom but not the cause. It is important to note that the price of gold in India, even before the proposed hike in import duty was seven percent higher than the international price. This proves that when demand gallops ahead of supply, higher prices are bound to prevail. Gold has a low elasticity to price and therefore, higher duties have less effect on consumption and imports.
The number of artisans employed in the gold jewelry industry across the country is estimated to be nearly two million people. If gold’s demand drops by 10 percent, there will be a direct bearing on the unemployment levels, which in turn has the potential to create social problems like crime and suicide.
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