Government Raises Levies On Gold Amid Widening Trade Deficit, Falling Rupee

India has raised the customs duty on gold from 10.5% to 15% amid the country's widening trade deficit and weakening currency.

“There has been a sudden surge in imports of gold. In the month of May, a total of 107 tonnes of gold was imported and in June also the imports have been significant. The surge in gold imports is putting pressure on current account deficit,” the government said in a press release.

India's trade deficit widened to a record high of $24.29 billion in May. Gold imports stood at $6 billion in May. The higher trade deficit is expected to lead to India's current account deficit widening to 2.5-3% of GDP in the current financial year. The current account deficit was at 1.2% of GDP in FY22.

India's gold purchases rose in 2021 as well. According to World Gold Council, the country imported 925 tonnes of gold in 2021, the most since 2011.

Higher duties could dampen imports and end-user demand, which tends to be sensitive to prices.

"The rise in duty is very unfortunate. We constantly hold talks with the government to reduce duty on gold and this increase will further support illegal gold coming in to the country," said N Anantha Padmanaban, Chairman, All India Gems And Jewelry Council. "The move will also have an impact on the jewelry industry which has anyway seen demand remain sensitive since the pandemic," he added.

Alongside, the government imposed special additional excise duty and cess of Rs 6 per litre on petrol and Rs 13 per litre on diesel. A special additional excise duty of Rs 6 per litre has also been imposed on exports of aviation turbine fuel.

The widening trade deficit and slower capital flows have put pressure on the Indian rupee, which fell to a record low below 79 against the U.S. dollar on Friday.

"The indirect import and export curbs by duty tweaks aim to reduce the impending pressure on current account deficit and thus the currency. This policy action by the government comes after RBI's consistent intertervention in all currency trading spaces to signal its support," said Madhavi Arora, lead economist at Emkay Global.