India To Make Gold Imports Expensive To Reduce Current Account Deficit

The Indian government is considering steps like raising the cost of gold imports to rein in the rising current account deficit, says Finance Minister P Chidambaram.

"We may be left with no choice but to make it a little more expensive to import gold," Chidambaram said at a media briefing Wednesday, according to Reuters.

"This matter is under the government's consideration," he said.

However, the finance minister did not elaborate on the measures being considered but added that the decision would be taken soon. "We will let you know when (the) decision is taken," said Chidambaram.

India is the world’s top most buyer of gold and the metal is the second-largest component of country’s imports by value. It imported about $60 billion worth of gold in the fiscal year ending March 31, 2012, compared to the $40-billion worth of gold imports in the earlier year.

Worried over the high current account deficit, the government doubled the import duty on gold to 4 percent in March. Both the government and the Reserve bank of India (RBI) urged the investors to refrain from investing in gold to hedge against inflation.

Increase in import duties coupled with the record price led to a decrease in the imports of gold this fiscal year.

Chidambaram said he expected that the gold imports would touch $40 billion in the current fiscal year, down 31 percent from the $58-billion bill a year ago, according to Reuters.

The domestic demand for gold was lower owing to the high price of the yellow metal in the domestic market. Depreciation of the rupee against the dollar kept the price of gold higher than compared to its price in the global markets. Economists believe that any increase in duties will pull down the demand for gold.

"As it is demand is lower and this could dent demand for gold further," Gnanasekar Thiagarajan, director of Commtrendz Research in Mumbai, told Reuters.

"Because of inflationary fears, the government is not increasing duty on other essential commodities. Since this does not affect the common man, government could be encouraged to increase duty further to curb imports," said Thiagarajan.

The data released by the RBI Monday showed that India's current account deficit widened to an all-time high of $22.3 billion, or 5.4 percent of gross domestic product, in the July-September quarter owing to a slow export growth and high gold and oil imports.