Fear that Gold Duty Hike Will Encourage Grey Market

(IDEX Online News) – The Indian government’s increase in the import duty on gold to 6 percent will encourage the development of a gray market and lead to consumer confusion, says Haresh Soni, a leading jewelry retailer and president of the All India Gems & Jewellery Trade Federation (GJF).

“The result of the increase in import duty will be that the total import of gold will become decontrolled. Until now, the yellow metal has come through strictly controlled channels,” Soni told IDEX Online.

“This will encourage the development of a gray market that will, of course have lower prices and that will leave the consumer confused about what to buy,” he added. “The increased margins between the officially imported gold and that which has evaded the duty will only increase the likelihood of smuggling.”

India on Monday hiked the import duty on gold citing a trade deficit that had reached a record high of 5.4 percent of the country’s gross domestic product in the July-September quarter. India is the world’s largest importer of gold and the yellow metal is the second largest contributor to the country’s import bill after crude oil.

Soni felt that the government might have tried other ways of curbing gold consumption. “This measure will have some effect in the short term but won’t in the end really curb the Indian consumer’s appetite for gold. The Indian consumer still wants gold and will resume buying it once the situation becomes more settled,” he said.

Bullion dealer Prithviraj Kothari of Riddhi Siddhi Gold felt that the hike in import duty would have a minimal impact on consumer consumption of gold. “The rupee has appreciated 3 percent,” he noted, “and so the impact of this on the rupee price will be minimal.”

Kothari also felt that the measure would not go very far in achieving its goals. “This will at best reduce the country’s current account deficit by between 5- and 10 percent,” he said.

Kothari did not think that the new duty would lead to a rise in smuggling. “The conditions aren’t what they used to be 30 years ago,” he said. “We’ll probably see an increase of between 5- and 10 percent in the personal carriage of gold, but that won’t really have an impact on the market.”