Posted On Thursday, Feb 24, 2011
Here`s Part 2 of the Union Budget - 2011 Series.
But is this a justified move? Is the hike required?
In order to validate the rise in custom duty, let`s first understand why the customs came into existence.
Until a few decades ago, India was a self-sufficient, inward looking economy that was focused on reducing imports using import substitution and which supported scarce foreign exchange. And then in 1962, the Customs Act was established to protect local industries and prevent illegal import and export of goods.
However, over a period of time we saw transition, and the Indian government decided to open its economy to foreign business. The introduction of liberalisation reforms helped to free the gold market through unrestricted movement of currency.
And all went well till recently when the reforms were reversed and gold customs duty was increased. Ironically, India has been producing almost negligible quantities of gold in comparison to its consumption and hence there was no real requirement for custom duty to be levied, especially not by claiming protection for domestic industries.
Previous Budgets saw a reduction in customs duty. Here`s a brief look at the justifications provided by the then Finance Ministers:
Those were their justifications, here are some of our questions that remain unanswered...
Where has the dream of making India the gold-trading capital of the world disappeared to?
Will increasing the duty on gold now not lead to smuggling?
India has all it takes to become a dominating power house that can control the gold market because of its great consumption power, huge gold stock reserves with individuals, and established exchanges and products that are needed for the development of the gold market already in place. However, instead of being a price driver, we have been categorized as price takers.
In today’s date, customs duty has become a major revenue-earner for the country and this dream of making India the gold-trading capital has been sacrificed for the sole purpose of filling the government coffers in a bid to reduce the deficit. This is done by burdening consumers who are already under the pressure of rising prices; and all the while the basic intention behind its introduction lies conveniently forgotten by the concerned authorities.
Government policies play a big role in making or breaking the market. Hence, we urge the Finance Minister to stay uninfluenced by the short term gains of the custom duty and look towards the complete development of the gold markets in India.
By introducing Gold ETFs in 2005-2006, the then Finance Minister took a step forward and enabled investors to buy and own gold more efficiently. We need more steps like these to make the gold markets much stronger.
A few other reforms that can be introduced to fulfill the dream of making India the gold-trading capital of the world:
We all agree that these reforms cannot be achieved overnight and implementing them is a gradual process. However, if these small steps towards strengthening the gold market are taken, we will soon become the world leaders in the gold market.
On that note, here’s looking forward to a Budget that will truly dazzle.
The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
Get In Touch
Take small steps in financial planning to achieve big dreams! Start your investment journey today!