Bring it down

The import duty on gold cannot stay high forever

The chairman of the Prime Minister's Economic Advisory Council, C Rangarajan, is one of the most important voices in the government on the direction of economic policy. His statements are, thus, carefully watched as a signal of New Delhi's thinking. In the midst of India's worrying vulnerability on the external account last year, his was one of the voices calling for curbs on gold imports; a large part of the increase in the import bill, which contributed to a very high current account deficit, came from household imports of gold. The current account deficit in the third quarter of 2012-13 was 6.5 per cent of gross domestic product; in the third quarter of 2013-14, it had come down to 0.9 per cent of GDP. Part of that could be attributed to an escalation of duties on imported gold, from an effective rate of about one per cent to 10 per cent. Clearly, in crisis mode, an increase may have been warranted; but, certainly, this could only be seen as a temporary crutch and not a permanent, structural change. Yet, in an interview to this newspaper recently, Mr Rangarajan insisted: "I don't think the customs duty on gold is so high. If you look at the import duty on many other luxury goods, others have much higher duties."

This argument does not hold water. First of all, gold should not be seen purely as a luxury good; for many, it is seen as a crucial hedge against inflation, in the absence of deep and trustworthy financial markets. Second, comparing gold to other luxury items is wrong. Unlike, say, Mercedes cars, gold is easy to smuggle. Surely the memory of the 1970s and 1980s, when smuggling of the yellow metal thrived, should have served as a strong enough warning against continuing with a 10 per cent import duty on gold imports. It is inconceivable that a prohibitively high duty on gold imports could be considered a semi-permanent measure. That incentivises smuggling, with all the consequent costs to communities in terms of criminality.

Sound economic thinking requires, instead, the government to set a duty for gold by comparing it not to "luxury items", but in such a way that the profits from smuggling large amounts of gold do not outweigh the costs. There is some doubt as to what this figure could be - but it is certainly not 10 per cent. Already, gold seizures have gone up across entry points into India. By some estimates, 150 to 200 tonnes of gold have already been smuggled in. Smaller neighbouring countries have also seen a spike in their gold imports, a sure sign that smuggling into India is on the increase. It is vitally important that gold duties come down to a more reasonable level before these incipient smuggling networks become entrenched. The government should work on exactly what a reasonable level of duty for gold imports should be - and, as soon as possible, announce a road map for getting there. In the meantime, it must recognise that India's current account deficit has structural sources - a weakness in exports, in particular. The only real cure for that is a depreciating currency and investment in infrastructure.