The Gold Tax

With increased import duties on gold, we return to pre-liberalisation thinking

The inflation crisis of the last six years, coupled with a persistent lack of financial inclusion alongside a decade of high GDP growth, has given an upsurge in demand for gold. The increase in custom duty on gold proposed by the Union budget, and the reduction in the loan-to-value ratio of gold loans by the RBI, will hurt the poor.

The Union budget has proposed a doubling of the custom duty on gold imports. In the eyes of policymakers, Indian households are consuming "too much" gold. Raising import duties would make gold costlier and is expected to restrain gold purchases. Implicit in this argument is the idea that the government knows what is best for the household and for the country. The omniscient state guides households towards the right choices on buying gold or petrol through tax and subsidy policies. This kind of thinking is reminiscent of India in the pre-liberalisation days. Mobile phones were considered inessential, so there were high customs duties on them.

Ironically, it was when Manmohan Singh became finance minister, India moved away from the thinking that imports of consumer goods was bad, and among them that of luxury consumer goods was even worse. Customs duties on gold were removed; gold smuggling and the associated criminality collapsed. Today, when he has ascended to prime ministership, we are regressing into old policy instincts. Gold is easy to smuggle; perhaps we will now once again get Bollywood movies featuring fast boats from Dubai or Pakistan carrying gold to India.

But gold is not merely a consumption good. It is also a financial asset, particularly for the poor who are excluded from mainstream finance. Gold is particularly important in shifting power within poor families to women. Often gold jewellery is purchased through a loan from the local jeweller by a woman who quietly saves a few hundred rupees when possible and pays him towards the purchase. In the end, she owns a financial asset that is liquid, that is, can be sold easily, or used as an excellent collateral for taking a loan.

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