The stated reason behind increasing the import duty on gold from 10% to 12.5% is that it is a non-essential import. But, is that really the case?
For centuries, gold has been an important part of India’s financial system. Owning gold gives a sense of financial well-being to a family. It is this reason, which made gold an important asset to invest in for crores of Indians.
On the other hand, importing gold also means that country’s foreign exchange has to be used for it. In the opinion of some experts, that foreign exchange could be spent better on other more important imports.
But, it is not that simple. For a lot of people, majority of them poor or low middle income, investment in gold is a must. They have to give gold ornaments and jewellery to their daughters when they get married.
Did Union Finance Minister, Nirmala Sitharaman, estimate how such people are likely to get affected by a 2.5% hike in import duty of gold? Let us take another situation. Suppose majority of people in India decide to reduce purchase of gold. Are they financially savvy enough to know what to do with the money, which is not getting invested in gold? It must be reinforced here that gold is more of a financial asset than a non-essential import, as the Central Government has maintained.
In Goa, the price of standard gold jumped from Rs 34,000 per ten gram to Rs 36,000 within five days after Sitharaman increased the custom duty. Clearly, people are going to face the brunt of price increase, which is going to badly affect their finances.
Let us also not forget that few years ago custom duty on import of gold was just 1% in India. From that level, it has now been increased to 12.5%. Such increase might have been good for the exchequer, but it surely has made gold more expensive for people.
The basic point is that gold is not a luxurious good, which is bought only by rich people. Had that been the case, it would have made perfect sense to increase the custom duty. Since middle income, low middle income and even poor people buy gold, the issue becomes really complex.
Experts have also raised concerns that smuggling of gold will increase because there are people in trade who are not willing to pay an increased custom duty.
It would have been better if the government had strengthened systems to ensure smuggling doesn’t happen before increasing the duty.
The other question is: Will the government reduce custom duty if demand of gold does not fall significantly even with a 12.5% duty? Perhaps, it is a good idea to revisit this decision within a year’s time when the next budget is presented.
