Gold prices may rise on likely import duty hike

Even when gold prices in the international market are expected to come down, prices in India may go up with the government mulling plans to increase the import duty further from the current six per cent, corporate insiders said.

The decision has not been taken as yet but it may be on the cards, sources said, adding that the government and the Reserve Bank of India (RBI) have initiated a raft of measures to check gold imports and give some breathing space to the ballooning current account deficit (CAD).

Country’s gold imports shot up 138 per cent in April as customers took advantage of lower prices, increasing pressure on the CAD and limiting the space for monetary easing even though inflation slowed down last month, reveals the data released.

The surge in gold buying sent the April trade deficit to $17.8 billion, up more than 72 per cent from March, data showed, because retail customers in India went on a buying spree after a sharp fall in global prices. In India gold prices corrected by around 30 per cent.

On Monday the government expressed concern over the rising CAD deficit due to the massive demand of gold and hinted some stricter rules.

C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said April’s surge was an aberration and demand would be lower in 2013-14… we would have to be more careful on curbing imports through increasing duties further as it may lead to gold coming in through unofficial channels.”

“It clearly means that raising import duties alone will not restrict imports as it can also lead to smuggling of gold,” said an analyst.

“We don’t expect another hike and the government and the RBI have understood that this will lead to import of gold through illegal channel. Further increase in the import duty will encourage smuggling and the income generated from these activities might be used in various illegal activities,” said Bachhraj Bamalwa, former chairman, The Gem and Jewellery Trade Federation.

“The smuggling of gold was practically nil before this period but has increased ever since the import duty has been increased. Bamalwa said.

The rise in gold imports is surprising. It was not expected,” claimed commerce secretary SR Rao.

“Seeing the widening CAD, the government was shocked and increased the duty to six per cent in the month of January 2013 to stem a rising import bill,” said Namit Dave, a gold analyst.

Earlier last year, import duty was increased from one per cent to four per cent.

A city based jeweller on the condition of anonymity said on a one per cent hike in import duty, one kg of gold would be costlier by Rs 27,000-Rs 28,000 seeing the current market price. “If two per cent is increased we will be in trouble and sales will be down for some days,” he said.

Talking about the survival of the jewellers and women’s love for the yellow metal, Bablu Dey, director, Guinea Emporium, said the jeweller would weave in less grammage into the making to cater to growing demand.

On Monday, the Indian rupee which was ruling at around 55 against the US dollar appreciated to around 54.80 and on Tuesday it opened at Rs 54.65 in the morning hours.