Improved Current Account Deficit: Gold import curbs to be eased .

NEW DELHI: Gold buyers and the trade may soon have reason for cheer. The tough restrictions on the metal's imports could be eased following a dramatic improvement in the current account deficit and an unintended consequence of the curbs - a rise in smuggling.

"A review of the duty structure and the measures to restrict exports is expected by this month end," said a finance ministry official.

Economists support relaxation of the measures.

"The government and the central bank have already begun to unwind steps that were taken to address high CAD and sharp rupee depreciation. This is the right time to begin steps to contain gold imports," said DK Joshi, chief economist, Crisil. But it should be done in a calibrated manner to prevent any shock to the system, Joshi said.

The government had raised customs duty on standard gold to 10% from 2% over about two years to contain imports that bloated the current account deficit to an all-time high of 4.8% of gross domestic product, or $88 billion, in the year to March. The country spent $56.8 billion of its precious foreign exchange reserves on gold imports in the last fiscal year.

The high current account deficit and concerns over its funding were largely responsible for the rupee plummeting in August after the US Federal Reserve signalled its intention of rolling back its stimulus programme, an action it hasn't begun as yet. As part of the steps to clamp down on gold imports, the Reserve Bank of India had in July introduced an 80:20 scheme - 20% of the bullion imported had to be exported back. Imports were also not allowed if importers were unable to meet the 20% norm.

The government also banned trading of gold in special economic zones.

The measures had the desired impact of slowing down gold and silver imports to $25.5 billion in first eight months of the fiscal from $33.5 billion in the year earlier. The fall has been more dramatic of late with imports dropping to $1.2 billion in November. Meanwhile, the rupee strengthened over 10% to 62.19 to the dollar as of the Friday close from the record low of 68.81 in August.

But a section of the government is beginning to worry about ramifications of these measures - rise in smuggling, effect on small traders and pent-up demand building up.

"There have been several representations," said the official cited above, adding that a call will have to be taken based on several factors, including the degree of the threat to CAD, the impact on duty collections as gold imports shift to unofficial channels and the effect on employment. Gold traders and jewellery exporters have lobbied hard with the government for the easing of the import compression measures, arguing that they had fuelled the grey market and hurt trade badly.

Up to October, gold worth Rs 208 crore of has been seized from smugglers against Rs 107 crore last year and Rs 42.38 crore in 2011-12. India's neighbouring countries, which have lower duties, have seen a surge in their imports of the metal. This gold is then being carried across into India by smugglers to take advantage of the duty differential. But the overall decline in the official trade has hurt the jewellery industry, which is one of the large employers in the unorganized sector. Gems and jewellery exports have also been subdued. as the import norms have proven too cumbersome.

Political calculations have also come into play with the Congress getting a drubbing in the recent assembly elections. Ahead of next year's general elections, the government does not want any kind of backlash as the jewellery sector is a large employer in many states including Gujarat.

Source : economictimes.indiatimes.com