The government is firming up plans to cut taxes on gold and ease bullion import rules, in a move that could signal a staggered roll-back of measures announced last year to contain a surge of dollar outflows.
Finance minister Arun Jaitley will likely announce the measures in the NDA government’s first budget in July, sources indicated, adding, the rise in global crude oil prices following the unrest in Iraq is unlikely to stall the move to cut taxes on gold shipments.
“There have been discussions on this (Iraq) but it is being overplayed and the current account deficit (CAD) will be very much in control,” a senior finance ministry official, who did not wish to be identified, said.
The government is also set to easing the 80:20 rule which essentially means that 20% of the imported gold must be exported.
“The government is looking to ease the curbs as it has created artificial supply constraints for consumers,” the official added.
The unrest in Iraq, if it escalates, can potentially push up crude oil prices resulting in higher diesel and fuel prices. Besides, the high oil import bill will result in dollar outflows and hurt the rupee’s value and the CAD.
India had raised the import duty on gold from 4% to 10% rein in CAD — a broad measure of dollar inflows and outflows — that hit a record high of 4.7% of GDP in 2012-13 and the rupee had plunged to a record low of 68.85 against the US dollar.
CAD has dropped sharply to 1.7% of GDP or $32.4 billion in 2013-14, primarily aided by plunging gold imports. Gems and jewellery export account for about 15% of India’s total outbound shipments and exporters have been pitching for lifting import curbs on the yellow metal.
“Though a lot is being talked about the Iraq crisis but it may not have damaging impact and the CAD problem is not likely to come up the way we saw it did in the last financial year,” said Soumya Kanti Ghosh, chief economic adviser, State Bank of India (SBI).
An internal SBI research report said that even if the prices move up to $115 (the worst case scenario), CAD would still be below 3% of GDP in the current financial year (2014-15).