India is unusual. Even though the country is one of the leading sources of gold demand worldwide, there is almost no domestic production. As such, when demand rises, imports tend to rise in sync. This can, at times, have a significant effect on India’s trade balance and current account.
This was particularly in evidence after the Global Financial Crisis, when gold imports rose sharply, reaching a high of Rs2,922bn by FY 2012-13, almost 20% of total imports to India. A combination of rising demand for gold, reduced demand for Indian exports and soaring oil prices had severe implications for India’s current account deficit (CAD).
From less than Rs116bn in 2001, the deficit surged to Rs4,796bn in FY 2012-13, equivalent to 4.8% of GDP.
Faced with this fiscal imbalance, the government imposed restrictions on a raft of imported goods, including gold. Duties on gold imports increased five-fold in less than two years, from 2% in January 2012 to 10% in August 2013.
The government also implemented the ‘80:20’ rule, under which gold importers were required to export 20% of their gold as jewellery.46 Recognised as unwieldy and market distorting, the rule was scrapped in November 2014 but import duties remained at elevated levels. And in July 2019, they were raised still further to 12.5%, as part of a series of tax-raising initiatives designed to improve the government’s fiscal position.
The Basic Customs Duty (BCD) on gold was reduced to 7.5% at the Union Budget of 2021-22 but, in combination with other levies, total import duties on gold still stand at 10.75% (compared to 12.875% before the budget).
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