India has hiked the basic import duty on gold to 12.5 per cent from 7.5 per cent, the Union government said in a gazetted notification on June 30. The decision came after country’s trade deficit had widened to a record high last month and rupee had tumbled to a record low. “The decision to increase duty was two-fold, one was to compensate falling income from petroleum taxes and another is an attempt to keep current account deficit in check,” explained Bhavik Patel, senior commodity/currency research analyst at TradeBulls Securities told News18.com.
Why Govt Hikes Import Duty on Gold
India’s trade deficit ballooned to $24.29 billion from $6.53 billion in a year, according to the data released by the government. The trade deficit during the first two months of the ongoing fiscal widened to $44.69 billion against $21.82 billion in the same time frame last year. The widening trade gap and continuous outflow of foreign funds pushed rupee to a lifetime low of Rs 79.12 against US dollar on Friday.
India is second-biggest gold consumer in the world, after China. The country fulfills most of its gold demand through imports and it is largely driven by the jewellery industry. The imports of gold in May rose by almost nine times to $7.7 billion compared to a year ago, data showed. To curb import of the precious metal amid increasing trade deficit and ailing rupee, the central government took the decision to hike import duty on bullion.
“India is currently facing higher current account and trade deficits due to weakening of rupee and other volatile macroeconomic factors. After the pandemic, an increase in the demand of gold impacted the deficits badly. To curb the imports, government has increased the taxes to make gold costlier. However, last year Centre has cut the import tax to 7.5 per cent to strengthen the domestic market, so it’s a kind of reversal to maintain the balance. The hike will increase the gold rates in local markets,” said Ravi Singh, vice president and head of research at Share India.
Gold Price to Increase by Rs 2,000 per 10 grams: Expert
After the latest hike, the levy on gold will be increased to 18.75 per cent. The total effective import tax on the precious metal will surge to 15.75 per cent which includes 12.50 per cent basic import duty, 2.5 per cent agri cess and 0.75 per cent social welfare surcharge. The safe-haven metal also attracts additional 3 per cent as Goods and Service Tax (GST), explained Sugandha Sachdeva, VP- commodity & currency research, Religare Broking Ltd.
“Considering the fact that we largely import gold to meet domestic demand, this is likely to lead to a proportionate rise in the price of domestic gold by around Rs 2,000 per 10 grams, factoring in international gold prices trading with a slightly negative bias,” Sachdeva told News18.com.
“For investors, this decision will make gold in domestic market expensive and today’s gap up in gold prices is testament to that. Market has already factored today’s rate hike in Multi-Commodity Exchange (MCX) gold prices,” Patel told News18.com.
On the Multi-Commodity Exchange, gold price future witnessed a huge jump on Friday. The precious metal future rose 2.28 per cent to Rs 51,670 for 10 grams at 1225 hours on July 1. Instead of buying in physical gold, investors can opt for gold ETFs, gold bonds now, analysts said.
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