The government has increased the effective import duty on gold from 10.75 per cent to 15 per cent. This has been done to support the Indian currency and reduce the trade deficit or the gap between imports and exports. cost about a dollar 75.9 as of April 1. It’s worth it now 79.
India produces very little gold and consumes a lot. In FY21, domestic production stood at just 1,127 kg. In comparison, gold imports stood at 651,240 kg. It refers to the gap between demand and domestic supply. In April and May, 139,943 kg of gold was imported, up 7.4% over the year-ago period.
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Overall, $7.78 billion was paid for this imported gold, an increase of about 11.8% compared to April-May 2021. Although data for June is not yet available, it is quite possible that gold imports have increased compared to last year. , Gold is seen as an inflationary hedge, and generally, people buy more of it when inflation expectations are higher than they currently are.
It has other effects. Internationally, gold is bought and sold in dollars. Therefore, the payment for imported gold has to be made in dollars. This increases the demand for the dollar and devaluation of the rupee. Of course, gold imports are not the only thing that is putting pressure on the rupee. There are other factors as well.
Foreign institutional investors have net shares of $33.6 billion since October. The war in Ukraine has pushed up the price of commodities such as oil, coal and fertilizer. This has led to a higher import bill for these items and a higher demand for dollars in the process. In addition, between January and May, imports of non-oil non-gold non-silver goods stood at $188.4 billion, an increase of about 32% from a year earlier.
All these factors as well as higher gold imports have put pressure on the rupee’s value against the dollar. The government cannot limit high oil imports. Also, a signal to FIIs to stop selling the stock and return the money will also lead to a further fall in the stock prices. So the government is doing whatever it can. One step is to increase the import duty on gold. Given its high price, unlike silver, gold has little industrial use. The idea is that higher import duties would make gold more expensive. Higher prices are expected to reduce demand and in the process help in controlling the demand for dollars and trade deficit.
Along with this, the government has also imposed a cess on the export of petrol and diesel. amount of cess 6 per liter on petrol and 13 per liter respectively on diesel.
It is expected that this will increase domestic supply of petrol and diesel and reduce import dependence on oil and its products.
Import dependence on oil consumption increased to 86.4% in May. It was 85.6% in 2021-22. With an increase in domestic supply of petrol and diesel, this dependence is expected to decline, easing demand for the dollar and pressure on the value of the rupee.
In conclusion, a weak rupee contributes to retail inflation, but it has other consequences as well. For example, the government provides fertilizer subsidy to farmers. The total fertilizer subsidy bill for April and May was 10,778 crore, or about 58.4% more than the year-ago period. Of course, fertilizer prices have gone up, but at the same time, the rupee has also depreciated against the dollar, adding to the fertilizer subsidy bill.
In view of these reasons, the central government is taking steps to slow down the devaluation of the rupee against the dollar.