New Delhi: Gold imports have contracted since an import duty recast last month made the yellow metal expensive, in what will help ease pressure on the country’s balance of payments.
Gold traders estimate the drop in the current quarter could be as much as 4-10% over the previous quarter ended December. According to Prithviraj Kothari, president of the Bombay Bullion Association, the provisional estimates peg gold imports in this quarter at 120-140 tonnes.
The consequent decline in demand for the dollar, according to bank dealers and an economist, would also help relieve pressure on the rupee.
Gold and silver imports in April-December aggregated $45.5 billion (around Rs. 2.2 trillion today), 54% more than the year earlier, commerce ministry data shows, giving policymakers cause for worry.
The widening trade deficit, propelled by high gold imports, together with withdrawals by foreign institutional investors (FIIs), put pressure on the rupee, forcing the government to come up with short-term measures aimed at curbing forex outflows and pushing up inflows.
In a bid to discourage gold imports, a notification was issued by the customs department of the finance ministry on 17 January, changing the import duty on gold to 2% of value from a fixed Rs. 300 per 10g earlier. On silver, the notification changed the import duty to 6% of value from Rs. 1,500 per kg earlier.
Bullion is India’s second largest import after crude oil.
“The ad valorem-based duty is not giving any clue to the consumer as to how much duty he has to pay,” said Pinakin Vyas, assistant vice-president at IndusInd Bank Ltd. “There is economic uncertainty in the global market and gold prices are at a high. The duty change is an added worry.”
Vyas said bullion importers such as his bank are being impacted by the volatility in gold prices, prompted by the shift to an ad valorem duty structure.
Another bullion dealer working for a foreign bank, who could not be named due to company policy, said in the weeks ahead, imports could further slow down and dealers would bring in only small amounts.
“Going forward, people may be very cautious with imports even though consumer demand is there for gold,” the bullion dealer said. “Everybody is watching the market.”
The falling gold imports will reduce demand for dollars, aiding the rupee’s appreciation against the greenback.
“Falling import bill is a positive for the rupee, though the rupee’s appreciation till now has been due to other factors,” said K. Harihar, head treasury at FirstRand Bank. “But on the other hand, a stronger rupee could also lead to more imports of the metal.”
In the last two months, the rupee has appreciated by more than 9%, recovering to 49 a dollar on Monday from a record low of 54 in December.
The contraction in gold imports is also expected to help reduce the trade deficit.
“Gold imports form a major part of India’s imports. The slowdown in gold imports will have a soothing impact on overall imports, which are expected to see a correction,” said Shubhada Rao, chief economist at Yes Bank Ltd. “For the full year, we are estimating India’s import bill at $463 billion and a trade deficit of $178 billion.”
The current account deficit, the trade deficit together with net invisible receipts such as repatriations, for the full year should be around 3.6%, she added.
However, others disagree.
“In January and December, $7.1 billion” of FII money has come into debt, $2.1 billion into equity, said Mohan Shenoi, president (group treasury and global markets) at Kotak Mahindra Bank Ltd. “And in November, inflows from NRIs alone have been $1.8 billion. Gold has no major role in the demand side (for dollars) to play.”
Dealers said bullion and trade associations have asked the finance ministry to revert to the original system of duty, which was at a fixed rate.
“We have told the government that the value-based system is really hurting us,” said one bullion dealer. “We have said that they can go back to a fixed duty and that they can feel free to raise it to raise revenue.”
Source : livemint.com