According to the World Gold Council Report 2014, India has witnessed a remarkable nine percent decline in demand of jewellery in the first quarter. The decrease in demand of gold has pushed India from being the first to the second largest importer of gold in the world, next to China. This noteworthy decline in demand has enabled the government to discourage investments in the unproductive glittering metal. According to the Reserve Bank of India’s 2013 report this decrement in demand has also helped control the country’s Current Account Deficit (CAD) which has fallen from $43.34 billion in 2012-13 to $39.5 billion in 2013-14.
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In order to keep the CAD in control, the Government of India had raised the import duty on gold from four percent to ten percent last year. Moreover, Import tariff on gold hiked to $411 per 10 grams on the 16th of June, 2014 from $408 per 10 grams in the beginning of this month, this move was notified by the central board of excise and customs. This high import duty will again limit the imports which in turn will lead to balance the country’s CAD.
Another measure that curbs the import of gold is the 80-20 rule, also known as the Pareto scheme; this rule requires the nominated agencies to export twenty percent of the inward shipments. The next deal by the importer can be initiated only after this rule has been followed effectively. Imposed in August last year, the exporters are demanding to scrap this rule since it has discouraged import by a considerable amount.
“With the import tariff rising high, the smuggling of gold is sure to increase. One cannot curb the demand just by rising tax, Indians still have their craze for gold and so the smuggling will also increase,” quoted Mr. Anurag Arora, a South extension based Gold Merchant.
Apart from the restrictions that are imposed on import of gold, the Indian consumers have also faced difficulties in making gold purchases since various rules had been imposed in the country to prevent electoral corruption which did not allow free flow of gold and cash. This has also hampered the demand for gold by affecting the genuine transactions that could have taken place this season.
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In addition to all the above stated factors, the violence in Iraq (one of India’s gold importer) has also added to the increased prices of gold. This has also dampened the demand of gold in our country.
Although, the gold imports have fallen by a significant amount, this has also led to increment in smuggling of gold which means that demand has continued to be the same indicating that the ‘Go for Gold’ attitude of Indians has perhaps still not changed. To discourage people from spending more on gold, one way is to make other investment plans like mutual funds more attractive. With the BJP led government hiking the import tariff on gold, it would be interesting to see how they curb the increasing smuggling as well.
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