Piloted by the Union Finance Minister P. Chidambaram, who was evidently exercised when the equity markets tumbled last week on the heels of RBI curbs on foreign exchange outflows, these measures, albeit being temporary, are likely to compound the crisis if the overseas investors take a cue and stay away from India instead of staying invested as desperately and devoutly desired by the UPA dispensation.

With gold emerging as a principal import item after the essential crude oil, the authorities are naturally badgered by its ascendancy in the import basket and its associated cost to the country. Hence, in a raft of rapid measures in a few days, the government hiked the import duty on gold, platinum and silver to 10 per cent, besides making upward adjustments in customs duties on gold ore/concentrate, gold dore bar and silver dore bar. To bring about parity, the excise duty on refined gold bar produced from gold ores/concentrates and gold/silver dore bar too was also raised. The revenue realisation of these customs duty adjustments would fetch Rs 4,830 crore in the remaining part of the current fiscal, though the authorities put on a brave face to state that the duty hike is aimed at checking deficit and not raising revenue. As if these steps were not suffice, the government also banned imports of gold coins and medallions as part of steps to prune its current account deficit. Gold coins and bars constituted about 36 per cent of aggregate demand in India with the authorities resolutely attempting to keep the imports of last year’s level of 845 tonnes this year too.

In a country where gold is patronised as much by rich and middle classes as by the ordinary people for whom a small milligram of the yellow metal is a must for marriages or other familial festivities as a sign of respect for tradition, how far and fast these measures would help defeating the very purpose by encouraging clandestine channels to crop up is anybody’s guess. More than such channels, the miseries they might contribute to by making a dent on the meager resources of aam aadmi would be too enormous to wish them away. With imminent festive season in sight, those trading in bullion have already begun stocking the yellow metal with the expectation of wresting the best out of the inelasticity of demand for this inessential but all the more inevitable part of legions of families. How else could one explain the price of gold revisiting Rs 31,000 per 10 gram last week?

It is altogether a different story as far as gem and jewellery sector export is concerned. While such exports declined from $44.9 billion in 2011-12 to $43.4 billion in 2012-13, gems and jewellery exports during the first quarter of 2013-14 was $10.1 billion against $10.9 billion in Apr-Jun 2012-13. Though the government did its best by revising duty drawback rate for gold besides introducing private/public bonded warehouses for gems and jewellery and other sops, the decline could not be arrested in the face of supply constraints slapped on this labour intensive manufacturing activity with added value. The country continues to be a net importer for this industry and the volatility in the overseas prices of gold and silver always heighten the vulnerability of the industry.

Despite several measures announced by the government in recent months to check gold consumption and dampen the demand, the available trends in imports now and for the near future do not countenance any scope for success. In 2012-13 the country imported 845 tonnes of gold valued at close to $50 billion. India’s insatiable appetite was seldom axiomatic after the hike in customs duty on imported. Being the biggest buyer of bullion with a record 162 tonnes in May this year as gold prices fell globally, the authorities duly hiked the import duty to 8 per cent. Though imports declined to about 31 tonnes in June, it rallied to 47.6 tonnes in July, prompting the authorities to hike it to 10 per cent more recently. According to the latest Report of the World Gold Council covering the first quarter of the current fiscal, significant increases in demand for gold most notably from consumes in China and India were seen. In India the demand increased by 51 per cent in April-June 2013 for gold jewellery while the demand for gold bars and coins surged by 116 per cent to a record 122 tonnes. The Council said the consumers in India revealed continued strong appetite with recent government measures to reduce demand having had little impact on the figures for the quarter under review. Thus the consumer demand was 310 tonnes up 71 per cent on last year.

What is particularly galling to domestic purchasers of gold—be it bullion traders, ornamental makers or ordinary consumers—domestic prices are now high with rupee touching a nadir in its value vis-à-vis US dollar on which import price is marked. As the implications for constrictions on the supply of the yellow metal would be too enormous to be brushed aside, the authorities need to keep a perpetual vigil on plugging loopholes in their restrictive regime, lest the experience of the 1970s and 1980s when gold control was in vogue provided fertile ground and bred clandestine and smuggling and hawala activities in bullion trade on a huge scale should revert to the dismay of the authorities. (IPA Service)