India hikes gold duties again to plug trade gap

Gold is hugely popular in India, in the form of jewelry and bars as a hedge against inflation. (File photo: Reuters)

India, the world's biggest buyer of gold, raised duties Tuesday on bullion imports for the third time this year as it battles to narrow a record trade gap and stabilize the rupee.

The government increased the customs duty on gold to a record 10 percent from eight percent as it strives to break the country's love affair with the precious metal.

The announcement boosted the Indian currency half a rupee from near lifetime lows to end the day at 61.19 rupees to the dollar.

"The markets are giving the benefit of the doubt to the government," said Indian bank HDFC in a note.

Gold is hugely popular in India, especially during religious festivals and wedding seasons, and is the second biggest contributor after oil to the current account deficit -- the broadest measure of trade.

Indians also buy gold in the form of jewelry, bars and coins as a hedge against inflation.

There is "a need for compression in the import of gold and silver", Revenue Secretary Amit Bose told reporters.

The government announced an identical duty increase on imports of platinum and raised the import tax on silver to 10 percent from six percent.

Bose said the duty hikes were part of steps to shrink the current account deficit which has caused alarm among rating agencies and helped push the rupee to record lows.

The increases come a day after Finance Minister P. Chidambaram said he planned a string of fresh measures to try to steady the rupee and raise capital inflows to narrow the current account deficit to 3.7 percent of gross domestic product this year from a record 4.8 percent last year.

The duty on gold stood at two percent in January 2012 and has been increased steadily since then, leading to a boom in smuggling.

Even with the duty increases, gold imports last month rose to $2.9 billion from $2.45 billion in June.

The level is still down a third from a year earlier and India is expected to cede its crown as the world's biggest gold buyer to China this year.

Last month, the central bank -- in a separate bid to cut the current account deficit -- set new rules that 20 percent of gold brought into India must leave as jewelry exports.

The bank has said until the rupee stabilizes it cannot lower borrowing costs to spur an economy growing at its slowest pace in a decade.

Chidambaram said higher duties on precious metals, allowing state firms to issue quasi-sovereign bonds abroad, curbing imports of non-essential goods like fridges that are made in India and attracting deposits from non-resident Indians should reap an extra $11 billion and help cap the current account deficit at $70 billion, down from $88 billion last year.

"If we can contain the deficit, sentiment about the currency market and the rupee will significantly improve," he said.

But critics call the measures piecemeal and say India needs sweeping economic reforms to restore confidence in the rupee.

India's woes have been exacerbated by signals the US could soon slow its stimulus drive that prompted big investment flows to emerging markets, and homegrown graft scandals that have virtually paralyzed government policymaking.

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Last Update: Wednesday, 20 May 2020 KSA 09:41 - GMT 06:41
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