Centre doubles import duty on gold, silver; move is criticised as retrograde

Why in the News?

India has doubled the effective import duty on gold and silver from nearly 9.2% to 18.4%. The decision came amid concerns over the impact of the West Asia crisis on India’s external sector and soon after the Prime Minister urged citizens to reduce gold purchases to conserve foreign exchange.

How has the government changed the import duty structure on gold and silver?

1. Customs Duty Revision: The government increased basic customs duty on gold and silver from 5% to 10%.
2. AIDC Increase: The Agriculture Infrastructure and Development Cess (AIDC) increased from 1% to 5%.
3. IGST Continuity: The Integrated Goods and Services Tax (IGST) remains 3% on the assessable value.
4. Effective Tax Burden: The cumulative effective tax burden increased from around 9.2% to 18.4%, including customs duty, cess, insurance, freight cost, and IGST.
5. Immediate Implementation: The revised rates came into force through official notifications issued on 13 May, without prior consultation.

Why did the government increase import duty on precious metals?

The government increased the import duty on gold and silver to defend India’s macroeconomic balance against external shocks by prioritizing non-discretionary resource allocations.

1. Current Account Deficit (CAD): Reducing import volumes directly curbs the widening Current Account Deficit to keep the trade balance within sustainable limits.
2. Foreign Exchange Conservation: India aims to preserve forex reserves and rupee stability, especially amid geopolitical uncertainty.
3. West Asia Crisis: Regional instability threatens oil prices, logistics chains, and shipping routes, increasing vulnerability for a crude oil-import dependent economy.
4. Import Prioritisation: The government appears to prioritise foreign exchange for essential imports such as:
   1. Crude Oil
   2. Fertilisers
   3. Industrial Raw Materials
   4. Defence Requirements
   5. Critical Technologies
   6. Capital Goods
5. Demand Management: Gold is treated as a consumption and investment good, unlike strategic imports necessary for production.

Why are the gems and jewellery industry opposing the decision?

1. Export Cost Escalation: Exporters argue that expensive imported gold raises production costs, reducing competitiveness in international markets.
2. Working Capital Blockage: Exporters now face bank guarantees of ₹28-30 lakh per kg of duty-free gold, creating liquidity stress.
3. MSME Vulnerability: MSMEs constitute nearly 80% of Gems and Jewellery Export Promotion Council (GJEPC) membership, making the sector particularly vulnerable.
4. Employment Risks: Higher costs could reduce export orders and employment in a labour-intensive sector.
5. Export Disruption: Industry stakeholders warn of lower shipments during a period already marked by trade disruption due to the West Asia crisis.

Can higher import duties reduce gold imports effectively?

1. Historical Experience: India’s past experience indicates that higher gold tariffs often fail to proportionately reduce imports.
2. Persistent Demand: Cultural demand for gold in India remains high due to:
   1. Marriage Expenditure
   2. Household Savings
   3. Investment Demand
   4. Inflation Hedge
3. Price Transmission: Higher tariffs often increase domestic gold prices rather than reduce demand.
4. Import Resilience: Despite global gold prices doubling in recent years, imports have not fallen proportionately.
5. Limited Elasticity: Demand for gold in India demonstrates low price elasticity, limiting tariff effectiveness.

Does a higher duty increase smuggling and informal trade?

1. Smuggling Incentives: Large differences between domestic and international prices create incentives for illegal gold inflows.
2. Historical Precedent: India witnessed higher gold smuggling during earlier phases of elevated import duties.
3. Revenue Leakage: Smuggling reduces formal tax collection and weakens customs enforcement.
4. Informal Economy Expansion: Illegal channels strengthen hawala networks and black-market transactions.
5. Policy Trade-off: Excessively high tariffs may undermine the original objective of reducing imports.

How important is West Asia for India’s gems and jewellery trade?

1. Diamond Export Share: West Asia accounts for nearly 18% of India’s diamond exports during the first nine months of FY 2025-26.
2. Import Dependence: Around 68% of India’s rough diamond imports originate from the UAE and Israel.
3. Trade Vulnerability: Regional instability directly affects supply chains, shipping, insurance costs, and export demand.
4. Strategic Dependence: The sector remains deeply linked to West Asian trade networks.

What concerns have been raised regarding policy transparency?

1. Complex Taxation Structure: Multiple amendments and notifications complicate duty calculations.
2. Ease of Doing Business Issues: Frequent tariff changes increase compliance burdens for traders and exporters.
3. Predictability Deficit: Sudden duty revisions reduce policy certainty for investment planning.
4. Administrative Complexity: Multi-layered taxation may weaken transparency in customs administration.

What are the Policy Alternatives to Import Duty Hike?

1. Gold Monetisation Scheme (GMS): Mobilises idle household gold through bank deposits, reducing dependence on fresh imports.
2. Sovereign Gold Bonds (SGBs): Provides gold-linked returns without physical purchase, lowering demand for imported gold.
3. Financial Savings Alternatives: Encourages investment in mutual funds, fixed deposits, equities, and pension schemes, reducing gold dependence as a savings tool.
4. Recycling of Domestic Gold: Strengthens refining and reuse of existing gold stock, reducing import needs.
5. Formalisation of Gold Trade: Improves hallmarking, digital tracking, and compliance, reducing smuggling and increasing tax collection.

Conclusion

The increase in gold and silver import duties shows India’s effort to protect foreign exchange reserves and manage external economic pressures during global uncertainty. However, past experience suggests that very high duties on gold may increase smuggling, disrupt markets, and hurt exports. A balanced approach, combining moderate tariffs with alternatives like digital or financial gold investments, may work better in the long run.

PYQ Relevance

[UPSC 2017] Account for the failure of the manufacturing sector in achieving the goal of labour-intensive exports rather than capital-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports

Linkage: The article links directly to this PYQ because the gems and jewellery sector is a labour-intensive export industry, and higher gold import duties can reduce its global competitiveness. It also highlights the challenge of balancing trade policy with export growth and MSME employment.