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Commentary

Raising Gold Duty Will Only Increase Gold Demand

The government has raised the Gold import duty to 6% from 4%, and pleads with people to please "moderate" their purchases of gold. This is a questionable move because:

Raising Gold Duty does what, exactly?
Raise the price of gold?
Isn’t that why people buy gold?

Let me back up.

Why does a country have import duty? To discourage imports and promote the use of local goods instead. This is done for cars, alcohol and a host of other things including tyres. So when imports become really cheap, local players are disadvantaged and the government raises duties to compensate.

However gold is not a consumption good. For the most part. It is used to make jewellery, but even that is considered an asset. Gold is a financial asset, and we produce nearly no gold locally. The duty will not encourage local consumption – it is designed to make people feel "Oh, gold is so costly, let me not buy any today". The makers of this duty are thinking of Gold in that statement as substituted for "imported basmati rice".

But gold is not bought for that reason. Gold is bought with the thought that "Oh, it’s costly today, it will be even more pricey tomorrow, so I can sell it at a profit". That’s why you put money in a fixed deposit. Or buy shares. It’s the allure of appreciation.

Gold tends to appreciate, so it’s attractive. It also loses nothing when you store it – unlike a car, which will need repair. Or electronics, which get obsolete. Gold remains gold, and it’s the exact same gold as you will get a year later.

So when you impose an import duty, you will only increase the price of gold in India. That means my 1 kg of gold is now suddenly worth 2% more due to an increase  in duty – or, at current prices, Rs. 60,000 more. (In reality, due to additional duties, it will be more than 80,000 rupees more expensive per kg.) If the price has gone up, people will think it’s a good thing.

All that the import duty will do is to make people feel that gold is an even better investment.

And it’ll encourage smuggling. Like this master card type of ad:

Day Trip to Dubai: Rs. 25,000

Price of 1 Kg Bar in Dubai : Rs. 30,00,000 (3 million)

Price the Jeweller will pay in India: Rs. 31,00,000 (At least. Post 6% duty Indian price=31.8L)

Profit: Rs. 75,000. A good day’s job.

Look on customs officers face while he frantically searches your bags as you keep the small 1 kg bar in your pocket: Priceless.

(Yes it is that small) [Source]

Raising Gold Duty Will Only Increase Gold Demand

How would I reduce the demand for gold?

  • Deflate. India keeps gold as a hedge against inflation, which has not been low for a long time. Deflate prices by restricting money supply. We may go through a recession but Gold prices will stagnate or fall.
  • Increase supply: While the government intends to bring ETF Owned Gold into the supply, that is hardly anything. All gold owned by temples/churches/mosques should be brought back into the market, giving them money instead (or a note saying they’ll get their gold back later if they want it).
  • Build artificial gold: Gold can be synthesised in nuclear reactors and particle accelerators; if we are serious about destabilizing gold, we should invest in such research.

Basically, make Gold a dud investment.

You can do the same thing with real estate to get even more economic value.

What do you think?

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