Finance Minister P. Chidambaram said on Wednesday that the government, facing a widening current account deficit, was considering moves to raise the cost of gold imports, hinting that import duty on the yellow metal may be raised.
The current account deficit or CAD, which represents the difference between export earnings and import expenses net of cash payments and remittances, hit a record high of 5.4% of the gross domestic product in the July-September quarter.
“We may be left with no choice but to make it a little more expensive to import gold,” finance minister P Chidambaram said here on Wednesday without specifying measures.A hike in import duty on gold from the current 4% can result in higher prices and cool demand for its imports.
A widening CAD is worrying for a slowing economy, where fulfilling dollar payment obligations may necessitate dipping into foreign exchange reserves.
So far India has been able to finance its CAD without drawing on its $300 billion foreign exchange reserves — mainly due to $12.8 billion in foreign direct investment (FDI) and $6.2 billion in foreign institutional investment (FII), he said.
External commercial borrowings (ECB) worth $1.7 billion have also helped in avoiding dipping into forex reserves.
The CAD has widened to 5.4% of GDP during the quarter and to 4.6% of GDP in the first six months of current fiscal, as exports contracted by 7.4%.
Gold and crude oil accounted for the largest component of India’s inward trade shipments, triggering a rise in dollar outflow.
“As would be evident, gold imports constituted a substantial chunk of imports and is a huge drain on the current account,” Chidambaram said. “Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserves could have increased by $10.5 billion.”
“While the CAD is worrying, it is within our capacity to finance it, thanks to FDI, FII and ECB. I again underscore the importance of FDI and FII. Attracting foreign funds has become an economic imperative,” he said.