Gold duty-cut hopes dim despite CAD cheer.

The chances of a cut in gold duty in the near term appear to be slimming even as an improvement in trade data makes a case for easing some curbs on the yellow metal.

In an interview with Business Standard, former Reserve Bank of India governor and chairman of the Prime Minister’s Economic Advisory Council C Rangarajan said he believed the existing rules and duties on importing gold were “reasonable”.

"The 10 percent import duty on gold is not high if one looks at the duty on import of other luxury goods," Rangarajan, a top policymaker whose advice is closely heeded in the high echelons of Indian power corridors, told the newspaper.

India’s current account deficit -- or the difference between imports and exports -- has been an economic Achilles Heel for the country for the past few years, widening to a record margin (USD 31.9 billion or 6.5 percent of the gross domestic product in the third quarter of FY2013).

The worsening in the CAD sent the currency tumbling to record levels of around Rs 68 to a US dollar, producing a cascading across the economy.

In a bid to curb Indians’ love for gold, much of which is imported from abroad and which forms a major component of Indian imports along with oil, the government increased duty on imports of the yellow metal from what was virtually 1 percent (a flat Rs 300 per 10 gm used to be charged) in 2012 to 10 percent.

But even as the CAD seems to be recovering well – it stood at USD 4.2 billion or 0.9 percent of GDP in the third quarter of this fiscal – helped by the curbs on gold import and the depreciating currency’s self-correcting mechanism which gave a boost to exports, a cut in duty seems some way off.

While the steep rise in gold duty achieved its intent of curbing gold demand, it has not come without its side effects.

A World Gold Council report recently said a whopping 150 to 200 tonnes of gold was illegally smuggled into India in a year to try and satiate Indians’ demand for higher gold.

The duty has also given weighed on organized retailers who buy gold after paying duties and taxes. A Mint report says retailers are flocking to unorganized small players in the gray market to buy cheaper gold that has been procured without paying due duties and taxes.

Finance Minister P Chidambaram who recently said the full-year CAD is likely to be below USD 40 billion for FY2014, less than half the USD 88 billion seen last year, has gone on record to say the duty on gold would be “revisited” once the full numbers would be out.

Another hurdle that stands in the way of a cut in gold duty could be the model code of electoral conduct, which has now come into force after the dates for the national elections starting next month were announced recently.

The code restricts incumbent governments from announcing steps that could be viewed as being taken to please a certain voting class and a cut in gold duty could easily meet the “voter-pleasing” criterion.

“If you talk about import duty, [which can be seen as doling out] allowances or benefits to some industries, EC will strictly go by the law of the land and would want to know why this has been done?” Election Commissioner Harishankar Brahma told CNBC-TV18 in an interview. "It can definitely be deferred till elections are over."

Source : moneycontrol.com