A lowering of import duty on gold is long overdue

livemint.com:

₹1 lakh a year – 9% owned or traded in gold, accounting for one tonne of the precious metal. Of those earning ₹1-2 lakh, 15% dealt in gold totalling 1.8 tonnes. The proportion was 26% for households earning ₹2-5 lakh, but they accounted for a lower volume of gold — 1.3 tonnes.

And just 1% of households with incomes above ₹20 lakh reported gold transactions, accounting for 0.4 tonnes of it. It should be noted here that 2020 was the year of the pandemic. Gold is a primary form of saving for the poor, who may sell it in times of need and buy it back when things are better.

This explains the higher gold-related activity among the poor, as the rich don’t need to sell gold to gain liquidity. High import duties on gold in pre-liberalised India led to large-scale smuggling and a thriving hawala business for cross-border payments, typically at exchange rates that yielded more rupees per dollar than at the official rates. Liberalisation changed all that.

The import duty on gold was slashed and the exchange rate allowed to float, wiping out the premium in the unofficial market. In 2012, when the current account was under strain, the government replaced the import duty on gold of ₹300 per 10 gm with 2% ad valorem (a tax based on the assessed value of an item). This was raised to 10% in 2013 after the current-account deficit widened to 4.8% of GDP, well above limits of prudence.

The macroeconomic pressure eased by September that year but the gold duty stayed high. A change of government did not alter that, although the import dropped to 7.5% for a while. The 2021 budget introduced an agricultural infrastructure cess on imports of precious metals and petroleum products, and added to the levy on imports.