The Indian government’s decision to reduce the import duty on gold in Budget 2024 has sparked significant debate among economists, policymakers, and the public. Gold is a crucial asset in Indian culture and economy and serves as both an investment vehicle and a symbol of wealth and status. The reduction in duty, aimed at addressing multiple economic issues, presents many benefits and challenges from the perspectives of both the Indian government as well as the public.
One of the primary reasons for reducing the duty on gold is to curb illegal smuggling. The original high import duties of 15% before the reduction incentivized black market activities. According to an article by the Economic Times around 150-200 tonnes of gold is being smuggled into India. By lowering the duty to 6%, the government aims to reduce the profitability of smuggling operations. This measure is expected to bring more gold transactions into the formal economy, increasing official revenue through legitimate taxes and duties.
Moreover, the reduction in import duty is also aimed at rejuvenating the domestic jewelry industry. Lower import costs can translate to more competitive pricing for Indian jewelry in the global market. In FY2022, India’s jewelry exports were valued at approximately $37 billion. Enhanced competitiveness could drive this figure higher, bolstering the industry’s contribution to the GDP and creating new employment opportunities. Additionally, by formalizing gold imports, the government can better monitor and manage the trade deficit. The unaccounted nature of smuggled gold creates big challenges in accurate economic knowledge and prediction. With reduced duty, gold imports become more transparent, helping in precise monitoring of trade flows. The formalization of these transactions is expected to improve the accuracy of trade data, helping in better economic forecasting.
On the other hand, import duties have been a significant source of revenue for the Indian government. Reducing the duty from 15% to 6% could lead to an immediate revenue loss which is estimated at 28,000 crore rupees by the Global Trade Research Initiative. This shortfall might impact the fiscal budget, especially if the anticipated increase in legal imports does not offset the reduction in duty rates which is very likely to be the case. The government likely cannot balance this potential revenue loss with merely the expected long-term gains from reduced smuggling and increased formal transactions and therefore there seem to be some ulterior motives behind this drastic slash of customs duty which needs to be explored in depth. India is one of the largest importers of gold, with annual imports averaging approximately 800 tons. A reduction in duty might lead to a surge in gold imports, exacerbating the current account deficit and straining the country’s foreign exchange reserves. The government must carefully monitor the volume of gold imports to prevent any adverse impact on the current account deficit.
For the public, the most immediate benefit of reduced gold import duties is the potential decrease in gold prices. Lower prices can make gold more accessible to a broader segment of the population, encouraging investment in this traditional asset. This is particularly significant in India, where gold is not only a form of investment but also an integral part of cultural and religious practices. However, while lower import duties can reduce gold prices, they may also introduce volatility in the market. Fluctuations in global gold prices can significantly impact domestic prices. Investors must be prepared for potential price swings, which could affect their investment decisions and financial planning.
In conclusion, the reduction of duty on gold in Budget 2024 is a multifaceted decision with both benefits and drawbacks. From the public’s perspective, lower gold prices and enhanced investment opportunities are clear benefits, but the risks of price volatility and economic impact must be carefully managed. While it aims to curb smuggling, boost the jewelry industry, and formalize gold imports, it also poses challenges such as potential revenue loss and impact on the current account deficit. In the next article I will continue talking about this topic by zooming in on the government’s perspective and trying to analyze what are some of the additional and unclear motives behind the government drastically reducing the customs duty and reducing their tax revenue by such a huge amount.
To be continued…
