It seems the government of India, which just slapped its first import-duty increase on gold in two years, now also wants to benefit from those trends.
The idea: Using India’s position as the world’s largest consumer of gold to at least partly plug the gaping hole in the government’s finances and the nation’s current-account deficit, both cited as factors in last year’s slide in the rupee.
Between August and December, the rupee /quotes/zigman/4868630/sampled USDINR +0.85% slumped 18% to a record low, sending the U.S. dollar above 54 rupees, which in turn has fueled inflation pressures in India’s import-heavy economy.
This has complicated matters for the Reserve Bank of India, which this week left its high policy interest rates unchanged, even as the economy slows.
Last week, the government said it would lift the import duty on gold to a flat 2%. That means having to pay the government about 520 rupees, or about $10, for 10 grams of gold imported, up from 300 rupees, or about $6, previously.
The duty will lift costs for the likes of Rajesh Exports Ltd. /quotes/zigman/1707163 IN:531500 +1.35% and other Indian jewelers, shares of which took a hit after the announcement.
As for the finance ministry, it estimates the move should bring in about 6 billion rupees, or $120 million, into the government’s coffers, just for the balance of the current fiscal year to March 31.
But the question of the day is what, if anything, it might do to support the rupee and improve India’s current-account deficit, which shows the country is a net debtor to the world to the tune of $44 billion in the current fiscal year, adding pressure on the rupee.
In a report by Macquarie Capital, which made headlines in India last month, the Australian investment bank said that the nation’s huge appetite for gold made its currency vulnerable and kept its economy dependent on investment flows to make up for the shortfall.
India’s gold imports, which stood at $23 billion in India’s fiscal year ended March 2011, have contributed to nearly a third of a 1.3% widening of its current-account deficit between 2008 and 2011, the report said.
Taking out gold imports over that period, it said, would have reduced the deficit by half.
India’s demand, mostly for jewelry for weddings, has over the years diverted nearly $1 trillion of wealth into unproductive channels for its economy, Macquarie also said.
Unlike savings in a bank account, which can be used to boost lending and the economy, gold in India tends to remain an inactive asset. It represents family wealth and, in spite of the precious metal’s huge price increase, it’s rarely sold, being instead passed on from one generation to the next.
Source : marketwatch.com