RBI suggests tax sops for pledging gold, higher import duties

The central bank says there is a need to moderate demand for gold imports, as ensuring external sector's stability is critical

Concerned over gold's impact on current account deficit which has soared to all-time high, the Reserve Bank of India (RBI) today suggested higher customs duties on import of the precious metal and tax sops for pledging gold with banks.

The RBI's suggestions came on the day when Finance Minister P Chidambaram said the government is considering steps to make gold imports more expensive.

Pointing out that large gold imports are adversely impacting the CAD, a draft RBI report said there is a need to moderate the demand for gold imports, as ensuring external sector's stability is critical.

"There is a need to moderate the impact on the current account deficit. Fiscal measures to reduce the gold imports may be revisited," said a report of the Working Group on Gold.

Coming out with large number of recommendations to deal with the rising gold imports, the panel suggested that banks need to design innovative financial instruments that can provide real returns to investors.

Recommending "introduction of tax incentives on instruments that can impound idle gold may be considered", the report said there is a need to convert both rural and urban demand for gold into investment in gold-backed financial instruments through dematerialisation of gold.

It has concluded that gold loans have a causal impact on gold imports substantiating the emergence of a liquidity motive for holding gold. Also, international gold prices and exchange rate "significantly and positively" affect the gold prices in India.

The report further said going by the past trends, "sharp sudden drop in gold price by 30-40% is a remote possibility causing financial distress to gold loan NBFCs".

Gold import is a major constituent of India's rising Current Account Deficit (CAD). The CAD, which represents the difference between exports and imports after considering cash remittances and payment, widened to a record high of 5.4% of GDP, or $22.3 billion, in the July-September quarter.