Finance minister Arun Jaitley's proposals on gold in his first full-year budget are likely to to become counter-productive because of his reluctance to remove the higher import duty imposed on the yellow metal, experts have said.

In his bid to make domestic gold attractive and by that way reduce imports, the finance minister has proposed three steps in the budget. He announced launching of a gold monetisation scheme to replace both gold deposit and gold metal loan schemes; a financial asset, sovereign gold bond, as an alternative to buying physical gold and also a India gold coin, which is expected to reduce demand for coins minted outside India and also help recycle the holdings available in the country. Indian households are estimated to be possessing 20,000 tonnes of gold.

The minister, however, did not reduce the high import duty of 10 percent imposed on gold, by the erstwhile United Progressive Alliance government in order to rein in the widening current account deficit due to increased out flow dollar to buy gold from overseas.

The jwellery sector had been seeking a cut in the import duty, which will increase the supply of gold and also curb illegal imports. Though the high import duty brought down imports, it has pushed up smuggling. According to World Gold Council, as much as 175 tonnes of gold were brought into the country through illegal routes in 2014. India legally imports about 900 tonnes of gold every year.

And so, the steps announced are not enthusing the the sector players.

"The FM has announced a slew of measures to curb black money in India, yet he has ignored one of the biggest issues of smuggling of gold into the country. Unless the import duty is lowered, the unofficial route will thrive and even black money may find a way into the country in the form of gold," Mehul Choksi, chairman of Gitanjali group, has been quoted as saying in a report in The Economic Times.

Gold, along with real estate, has always been an asset where unaccounted money is parked.

Traders, however, have told the newspaper that if the finance minister's gold monetisation scheme is attractive, it can bring down smuggling.

Another impact of the finance minister's hesitance to remove the restriction is a likely surge in gold imports in the next few months. This is because jwellers and traders have put buying of gold on the hold in the run-up to the budget, hoping the government will reduce the import duty. But with the status quo, in order to meet their pent up demand, they will have to go on a buying spree.

“Imports will pick up in March because in the past one month there wasn’t much imports. Everyone was waiting for the duty changes,” Rajesh Mehta, chairman of Rajesh Exports, has been quoted as saying in a Bloomberg report. He expects the imports to be 100 tonnes this month as against just 25 tonnes in February.

The reasons for the demand surge for gold during the UPA was two-fold: the high inflation, which typically increases the appetite for the metal as it is seen as a hedge against the price rise, and the rising prices of gold, which made it more attractive than any other financial assets.

So curbing the imports through import duty hikes was no solution as such restrictions will only increase illegal trades.

In contrast, the NDA has been lucky as inflation is trending downwards and overseas gold prices are also falling. The time is right for Jaitley to at least started reducing the duty.

But he seems to have missed a chance.

Source: firstpost.com