Gold Import Duty Reduction to 6% Expected to Curtail Smuggling and Elevate Exports

The recent decision to lower the import duty on gold is expected to curb smuggling and enhance India's gems and jewellery exports, according to CBIC Chairman Sanjay Kumar Agarwal. Last fiscal year, Customs and DRI seized around 4.8 tonnes of gold, up from 3.5 tonnes in 2022-23. The Budget has reduced the import duty on gold from 15% to 6%.

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Impact on Employment and Exports

Gold is a crucial raw material for the gems and jewellery sector, which employs nearly 50 lakh people and contributes about 8% to exports. Agarwal noted that high duty rates block capital needed for manufacturing and value addition within the country. He also mentioned that after the duty was raised to 15%, importers began bringing gold in non-bullion forms under various FTAs to avoid the levy.

Current Account Deficit Improvement

The duty hike in July 2022 was initially implemented due to a worsening current account deficit (CAD) caused by geopolitical issues. The CAD, which was 2% of GDP in 2022-23, decreased to 0.7% in 2023-24, with a surplus in the March quarter. Agarwal stated that the current position is better, making the previous 15% duty rate too high.

Smuggling and Arbitrage Concerns

Agarwal highlighted that the high duty rate led to increased smuggling due to significant price differences between domestic and international gold prices. The Budget proposal considered these factors when deciding to reduce the duty on gold and precious metals.

India imported gold worth USD 45.54 billion and silver worth USD 5.44 billion in FY24, while jewellery exports amounted to USD 13.23 billion. Typically, India imports 800-900 tonnes of gold annually. In 2022, India raised its basic import duty on gold from 10.75% to 15%.

Global Gold Sources

Switzerland is India's largest source of gold imports, accounting for about 40%, followed by the UAE at over 16%, and South Africa at around 10%. India is the world's second-largest consumer of gold, fulfilling most of its demand through imports, which pressures the rupee and CAD.

The gems and jewellery exporters have long demanded lower duties on precious metals to boost exports and manufacturing. The country's gems and jewellery exports fell by 3.5% to USD 7.26 billion during April-June this fiscal year.

The reduction in import duty aims to align with international prices and support domestic manufacturing by freeing up capital for value addition processes within India. This move is expected to benefit both employment and export figures in the sector.

Overall, lowering the import duty on gold is anticipated to have positive effects on reducing smuggling activities, improving export competitiveness, and supporting economic stability by easing pressure on the current account deficit.