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Raising duty on gold imports may help, but attracting foreign investment is the long-term solution
With the brisk pace of gold imports eating away at the current account balance, the finance minister has a problem on his hands. Higher imports of gold mean the government has to make more foreign exchange available to finance the inflow, which puts pressure on the rupee to dip compared to the dollar. A lower value of the rupee means the attractiveness of domestic financial instruments declines, making gold even more desirable. To this, add the unflagging draw of gold for Indians. The high inflation of the past few years has also added to the lustre of gold as a safe haven. In the GDP figures for the second quarter of the year, the expenditure on valuables, largely gold, has risen to 2.6 per cent of the GDP. However, this is less than the 3.4 per cent logged in the same quarter last year, which means the pace of growth has come down.
With this rate of growth, P. Chidambaram has indicated that he will raise the basic customs duty on gold, to make it more expensive to import. No doubt, the measure will have some impact. But it could also stimulate the dormant business of gold smuggling. Since this is a major source for the generation of black money and crime, the implications for the economy could be serious. It also turns out that gold imports, though rising, are not the fastest growing element in the list of India's financial transactions with the rest of the world.