Earlier this week, India announced that it will increase its import tax on gold from 7.5% to 12.5% from the current rate of seven percent. This move was aimed at curbing the country’s rising demand for the yellow metal. India is the second largest consumer of gold after China and the increase in imports has impacted the country’s trade deficit. But the government’s move has backfired as demand for gold will still increase the price of the metal in the local market.
In the face of rising inflation and deteriorating external finances, the government has taken unprecedented steps to curb the downward spiral of the rupee. The decision to increase the import tax on gold reflects the central bank’s desire to stem the current spiral. However, a sharp depreciation of the rupee would worsen the situation and trigger additional rate hikes. In the long run, this would be harmful for the country’s GDP.
While it may have some negative consequences for the Indian economy, the increase in the import duty on gold should be seen as part of the government’s strategy to fight higher inflation and arrest the slide in the INR. Further, the increase in duty on gold might be only temporary as a normal monsoon is expected to soften retail inflation. Further, the higher gold import duty may be lifted by the economy and the government once the trade balance has stabilized.
In the meantime, Indian consumers will still be buying gold to protect their assets against inflation and rising interest rates. But now is not the right time to increase the amount of money you put into gold as it continues to fall. In fact, some experts believe that now may be a better time to divert your capital into other tangible assets, such as stocks, bonds, and real estate.
In addition to a higher gold import duty, the government of India has announced an increase in the customs duty on the yellow metal. The new tax will effectively increase the price of gold in the country by 5%. The increase in import duty is expected to raise gold prices in India, but the impact on global prices will likely be more negative than the rise in the rupee.
The move comes as the government has announced a variety of measures to combat the external currency battle. The RBI Governor has said that the central bank will adopt a multi-pronged intervention approach to ensure that the rupee does not fall arbitrarily. India’s current account deficit is expected to hit 2.9 percent this year, nearly twice the level of last year. The government also announced higher taxes on gasoline exports, which sent Reliance Industries Ltd. shares tumbling by 4.3%.
