Gold import can hamper growth ?
Dr Ashwani Mahajan?
Union Budget 2012-13 proposes a hike in import duty on gold coins from 2 per cent now to 4 per cent. Similarly, Finance Minister has proposed to hike the import duty on non-standard gold. In the budget for the first time, excise duty has been imposed on unbranded jewelry at the rate of one per cent. Taxes on raw gold and its ornaments have been a matter of hot debate in the country during 21-day long strike and later on government’s promise to bring changes in excise duty proposals.
There is a general tendency to view excise duty on gold ornaments and import duty on gold with the same perspective. However, there is a need to view the two differently. It is true that both excise duty and custom duty are supposed to be imposed on gold. Nevertheless, the objectives to impose excise duty on gold ornaments and import duty significantly differ from each other. Objective of excise duty on gold is seemingly revenue generation, whereas objective of imposing custom duty is to restrict import of gold, as stated by the Finance Minister also. Attempt to impose excise duty on unbranded jewelry, though aimed at collecting revenue, may not be justified as it may hit millions of our small goldsmiths and jewellery merchants. Therefore, a roll back of excise duty on unbranded jewelry may be a desirable step.
Finance Minister in his budget speech had said that in the last two quarters, gold imports increased by more than 50 per cent. Gold imports have by now, surged to 15 per cent of our total import bill. In ancient times, India was called the golden bird. In fact, there had been no major mining of gold in the country. India had been providing a minor part in world’s gold production. However, people in India possess much more gold as compared to any other country. People in India buy gold jewellery not as just ornaments. They purchase jewelry as insurance against the future risks and also as investments. There has been a tradition of borrowing against the security of gold. Thus, attraction towards gold is obviously there in the country.
Prior to new economic policy, there were severe restrictions on the import of gold into India. Gold Control Act was under operation. Even then lot of gold used to be smuggled into India. Under the new Economic Policy adopted in the 1990s, restrictions on import of gold were removed and gold import was allowed after paying a nominal import duty. While the import of gold has already been significant, since 1990, in recent years it has witnessed tremendous growth. In 2000-01 the total imports of gold was worth Rs 18, 829 crore, it surged to Rs 15,4347 crore in 2010-11, that is, 8.2 times. During this period, the gold price increased about 4.3 times, so if seen in terms of volume, imports of gold has almost doubled. Finance Minister has stated in his budget speech that between July and December gold imports in fiscal year 2011-12 grew by 50 per cent, while the gold price had increased nearly 30 per cent. This means that gold import has been growing tremendously in value, as well as quantitative terms.
We have been facing unduly high deficit in the balance of trade. Our trade deficit in 2010-11 has risen to US$ 130 billion. We find huge amount of foreign exchange outgo year after year, despite impressive growth in software exports and remittances from NRIs, as deficit in our balance of payments has reached US$ 44.3 billion. It may be interesting to note that gold imports in 2010-11 were US$ 34 billion and may reach US$ 50 billion in 2011-12. Heavy import of gold is expected to increase our problems manifold. Growing balance of payments deficit has been worsening our situation in terms of foreign debt. Therefore, it is imperative to impose effective restrictions on import of gold.
In India most significant use of gold is in making of jewellery. Should we assume that people in India have suddenly started wearing double jewellery than before? Perhaps it would be a wrong assumption. It is more related to the quantum of black money in the economy. There is a growing trend of keeping black wealth in the form of gold. There may be several reasons for this emerging trend-
1. Formerly black money used to be kept in different forms – such as Kisan Vikas Patra, bank fixed deposits and real estate in benami names, and even currency notes. Massive increase in stamp duty, TDS in case of bank deposits and tax authorities’ eye on all these forms of (black) wealth by using information technology and other means, have reduced the popularity of these types of black assets.
2. Gold is becoming an attractive asset also due to its constantly rising price. The price of gold per 10 grams in 1991 was only Rs 3450, which increased to Rs 29,000 per 10 grams by 2011.
3. There are different kinds of security risks in keeping black wealth in real estate and other forms, while huge amount of black money could easily be kept in form of gold.
Beside sufferings of the common man due to the wrath of black money, rising gold imports is causing serious balance of payment related problems, like weakening of rupee, increasing burden of foreign debt and increasing dependence on foreign capital. The resources of the country are going into foreign hands. This trend must stop. It is imperative to impose effective restrictions on imports of all kinds, may this be, the import of Chinese goods, oil or gold.
(The writer is Associate Professor, PGDAV College, University of Delhi, email: ashwanimahajan @rediffmail.com)?