Is it right for the government to make gold costlier?

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 Is it right for the government to make gold costlier?
On Wednesday, P Chidambaram hinted that gold imports could be made dearer (by duties and taxes) unless Indians reduced their consumption. Clearly, if import duties are raised, it's going to make gold and jewellery in India costlier.

Is the government justified in doing so?

Let's try to understand why the government wants to curb gold consumption and hence import of gold. Gold accounts for the second largest share of imports, after crude oil. Importing more of gold poses problems for the trade deficit (imports-exports), since we import more than we export. When there is a trade deficit, there is pressure on the current account deficit, which in turn affects the currency.

If the Indian currency starts depreciating it makes oil imports dearer, and stokes inflation. It also puts pressure on the government's finances and the fiscal deficit goes higher, if the government is not able to pass on the hike in crude prices to the consumer.

So how does curbing gold consumption and imports help?

Curbing gold consumption would help reduce gold imports, which would help reduce dollar outflow and thus reduce demand for dollars and help sustain our currency at higher levels. It would help limit the current account deficit and hence put lesser pressure on the rupee. Lesser pressure on the rupee means a strong rupee, which would make oil imports cheaper, improve the government's finances and would prevent inflationary pressures in the economy.

For the July-September quarter of this fiscal, the current account deficit climbed to a record high of 5.4 percent of the GDP. Such high current account deficit is worrisome and could put pressure on the rupee.

Indian stock markets received huge inflows of dollars from foreign institutional investors who pumped money into Indian stocks, but, despite this the currency did not gain, because there was a huge dollar outflow for gold imports and crude oil imports, putting pressure on the Indian rupee.

We can't reduce import of crude oil, but, we certainly can reduce gold consumption. The Finance Minister is right in threatening to levy additional import duty on gold, so as to reduce its consumption by making the precious commodity more costlier.

Read more about: gold
Story first published: Thursday, January 3, 2013, 8:59 [IST]
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