Gold Rush : Consequences

India is a Gold Hungry country. But the extent of craze has hit a new peak. Last year, Gold import surged 50% , affecting fiscal deficit in a big way. Infact Gold import totalled US$ 60 billion as against US$ 150 billion of crude oil imports, and india's fiscal deficit widened to US$ 185 billion in 2011-2012.

After a long time Government tried to curb the demand for gold by hiking the import duty of 99.5% pure gold to 4% and excise on refined gold to 3%. But it was met with stiff resitance from jewellers forcing finance minister to review his proposal.

Though gold's role as a hedge against inflation is well understood, the increasing demand is threatening the health of the nation. Instead of locking up in unproductive asset like gold, diverting the investments to other liquid invesmtents like capital market would make sense in many ways.

The cap on baggage gold was relaxed in 2006. Passengers could bring 10000 gm of gold oncein six months by paying Rs.250 per 10 gms. This was done primarily to make smuggling unremunerative. But this could not reduce the demand for gold.

Following are few ways by wish this GOLD Menace can be tamed:

• An export commitment of equivalent or double the value of imports could be imposed
• Government can buy back gold and issue tax free bonds at interest rate of 1% to 2% below GSec Yield.
• Postpone Income tax on sale proceeds of Gold, if the proceeds are locked in infrastructure bonds
• Under current law, if the value of wealth (which includes Gold, car and property) exceeds 30 lakhs, we pay 2% Wealth Tax. Probably a seperate GOLD HOLDING TAX at same rate can be imposed for gold and gold jewellery holdings in excess of 500 gms.
• Gold ETF contributed in a big way to the renewed demand of gold. Many feel it is comfortable and convenient to hold gold in ETF format. Some things needs to be done to curtail Gold ETF's lusture.
• Last but not the least, Leanding instututions are contributing to gold rush by allowing jewellery as collaterals. Loan against Gold should be given at stiff rates.

Weather all these measures would bring down the price of Gold is a question at large, since China has oflate emerged as big buyer of Gold. But it would certainly address the fiscal deficit issue in a big way and help Rupee regain some of its lost value.