Worried over mounting Current Account Deficit (CAD), Finance Minister P Chidambaram today hinted at raising the customs duty on gold to check its imports, a measure endorsed by Reserve Bank and Prime Minister's Economic Advisory Council.
He also stressed on the importance on FDI, FII and External Commercial Borrowings (ECBs) to fund the CAD, which stood at $38.7 billion or 4.6% of the GDP at the end of first half of the current financial year.
Addressing a press conference, Chidambaram said gold import constituted a chunk of the imports and was a huge drain on the current account. Suppose gold imports had been half of the actual level, that would have meant India's foreign exchange reserves would have increased by $10.5 billion, he said.
Appealing for a moderation in the demand for gold which leads to large imports, he said, "I may add that we may be left with no choice but to make it a little more expensive to import gold. This matter is under government's consideration."
While the CAD was indeed worrying, Chidambaram said it was within India's capacity to underscore the crucial importance of FDI and FII.
"As I have said before, attracting foreign funds to India has become an economic imperative. I am confident that even the year ends with a slightly larger CAD than last year, we would be able to finance without drawing upon reserves," he said.
Chidambaram's caution on gold came on a day when the RBI came out with its draft report of a working group which also called for a need to moderate gold import demand considering its impact on the CAD.
The report recommended revisiting fiscal measures to reduce gold imports and the need to design innovative financial instruments that can provide real returns to investors.
The need to convert both rural and urban demand for gold into investment and gold-backed financial instruments through dematerialisation and introduction of tax incentives that can impound idle gold may be considered, the report said.
PMEAC Chairman C Rangarajan said there was need to address this critical issue and added that one factor that can contributed to reduction of gold import will be the ability to control inflation.
He said to some extent increasing import gold may curb imports but had a word of caution saying it should not result in loss of revenue as well as gold being smuggled in.
Traditionally, India has been the world's largest consumer and importer of gold. Gold maintained its renewed buying momentum for the third straight session in the domestic bullion market because of strong demand and bullish overseas sentiments.