The government announced a hike in the custom duty on gold from 7.5 per cent to 12.5 per cent on July 1 this year. Gold also attracts a 2.5 per cent agriculture infrastructure development cess (AIDC), taking the total import duty to 15 per cent. The steps were taken, according to the government, to control gold imports and the widening current account deficit.
Gold prices in the country shot up once the announcement was made. According to data available on the MCX website, gold rates crossed Rs 52,000-mark on July 1 for the first time since April 29, a period of over two-months. However, the gold rates have eased a little since then. On July 8, gold was trading at Rs 50,677.
Why was import duty on gold hiked?
According to a Finance Ministry statement, India’s gold imports rose sharply in the months of May and June. Indian gold imports in May were recorded at 107 tonnes, a rise of 790 per cent year-on-year. For India, this is especially troublesome as the country imports most of the gold it uses. India imported the highest quantity of gold in the last 10 years in 2021.
A rise in the import of the yellow metal leads to a rise in the current account deficit (CAD). India is already struggling with its CAD. As compared to a surplus of 0.9 per cent in FY21, the country recorded a deficit of 1.2 per cent in FY22. A report by Fitch Ratings earlier said that India’s CAD could rise to as high as 3.1 per cent of the GDP in FY23.
A burgeoning CAD also leads to the depreciation of the currency. Rupee has already been hitting its all-time low levels on and off for the past one month. On July 5, the rupee hit 79.38 to a US dollar, a historic low. Analysts have said that the rupee may fall to 82 per $ before recovering.
The Reserve Bank of India (RBI) and the Centre have been working to arrest the rupee’s fall. RBI has eased many norms that allow the inflow of dollars from NRIs. On the Centre’s side, the gold import rate hike is one of the steps.
The import duty hike will lead to a rise in prices of gold jewellery in the country. With the GST rate hike on cut and polished diamonds from 0.25 per cent to 1.5 per cent from July 18, jewellery will most likely get costlier.
As gold is traded as a commodity, its prices change daily. However, there are jewellery associations in Indian cities that determine the local rates of gold daily.
Generally, the cost of gold and import duty are added to arrive at the current prices. With the import duty going up, gold is expected to become dearer for Indian buyers.
For calculating the jewellery price, the following formula is used:
Current price of 10 gm (22 KT or 18 KT) gold X (Weight in grams) + Making charges + GST at 3% on (Price of jewellery + making charges) + hallmarking charge of Rs 35 per item.
How have gold rates performed in the last two years?
Since the onset of the Coronavirus (Covid-19) pandemic, gold prices have shot up considerably in India. In March 2020, the gold rate was between Rs 41,000 and Rs 43,000 per 10 grams. It breached the Rs 50,000 level in July 2020.
The gold rate touched its all-time high of Rs 56,000 in August 2020. Currently, it has eased to around Rs 51,000. With the hike in import duty, the prices may again shoot up soon.