Tuesday, January 22, 2013

The "Gold" Rush

India's problem of deficit is now widely known. Rising levels of both fiscal deficit and current account deficit are alarming for the country's economy. The government is using every possible tool in its hand to reduce this deficit so that India can get back on track of growth.

So now the yellow metal has been used as a tool by the government to reduce the current account deficit. Gold forms one of the biggest part of imports in India along with crude oil. So the customs duty has been increased by 2 % and now has reached 6%. Total import of gold into India in the year 2011 was more than 950 tonnes. It is estimated that there is gold worth $1.4 trillion in India. The attraction of Indians for the yellow metal has never reduced. And hence government thinks that increasing the customs duty would deter people from importing gold and thus reduce the current account deficit. Moreover the ETFs have been allowed to deposit a part of their physical gold in the banks thus increasing the circulation of gold in the economy which lies idle as of now.

However there has been a counter argument that this alone will not serve the purpose. It will only make the metal more expensive for the common man. One of the reasons why Indians love investing in gold is because they feel it is not only safe but also provides better returns compared to other investment instruments available as of now. So just raising the duty will not make much of a difference. If a real effect has to be seen then people must be provided with safer and better investment instruments only then can the attraction for this precious metal reduce.

Only time will show what effect does this increase in import duty brings with it !!!

Parth Pandya
SIMSREE Finance Forum