Editorial. Gold duty cut can help exporters and consumers if cost savings are passed on
Fri July 26 2024
Growth in Indian exports has been hit in recent years due to pandemic-related disruptions, weak global demand and geopolitical tensions. But besides these, there are inherent problems which impede the competitiveness of export too. The Budget for 2024-25 has tried to address some of these issues by announcing cuts in customs duties on raw materials imported by major exporting sectors such as leather, textiles, marine products, mobile phones, electronic products and gems and jewellery.
The reduction in customs duties on gold and silver to 6 per cent from 15 per cent and on platinum to 6.4 per cent from 15.4 per cent seems to be a move designed to boost one of the largest export items, gems and jewellery. Indian gems and jewellery exporters have etched a prominent place globally, ranking sixth in global markets with a 4.3 per cent share, with demand originating from a diverse basket of countries including the US, Hong Kong, the UAE and Belgium. But the cloudy economic outlook for US and China, geopolitical tensions and pricing pressures from lab-grown diamonds have caused gem and jewellery exports to decline 12 per cent in FY24. Due attention needs to be paid to the sector which enjoys 15.7 per cent share in India’s merchandise exports and is a significant contributor to employment generation. The customs duty cut on gold, silver and platinum will certainly bring down production costs in this thin-margin industry, helping Indian exports gain competitive edge in the global market. Exporters should ensure that they pass on the cost savings to their customers. Besides the duty cut, the proposal to make credit more freely accessible to MSMEs will help the sector, as many of the exporters in this segment are MSMEs.
The duty cut is also likely to act as a check on gold smuggling, which has historically widened with a rising price differential between global and Indian prices. According to reports, approximately 160 tonnes of gold is estimated to be smuggled into the country every year, accounting for almost a fifth of the annual imports. The sharp cut in duties depressing this differential will cut into illegal gains from gold smuggling. Given that domestic gold prices have immediately adjusted to this move, domestic gold consumers and gold jewellery manufacturers are, of course, the other key beneficiaries of this cut. Despite Indian gold prices increasing 30 per cent over the past two years, consumers have been thronging jewellery stores due to the inelasticity of wedding demand. The move could see the return of non-wedding demand and aid volumes and profit margins of jewellers.
Policymakers, however, will need to stay watchful about the impact of this move on the external account. Gold imports account for 6-9 per cent of merchandise imports and any surge in local demand can result in exacerbating the trade deficit, which has been under control lately. It may be recalled that large gold imports were one of the reasons behind the current account crisis in 2013. The rupee is currently at its lowest levels against the dollar and a worsening trade deficit can further put pressure on it.
Source: https://www.thehindubusinessline.com