Govt to increase import duty on gold, luxury goods

PSU financial agencies to get nod for quasi-sovereign bonds, oil firms to get ECB window

The government is looking at increasing the import duty on gold and on non-essential, or luxury, commodities to reduce the current account deficit (CAD), Finance Minister P Chidambaram said on Monday.

The government would also allow public sector financial institutions to raise dollars through quasi-sovereign bonds. For the first time, Indian subsidiaries of multinational companies would be allowed to raise funds from their parents through a relaxed external commercial borrowing (ECB) window. Public sector oil companies would also be allowed to raise funds via ECB. The Customs notifications on import duty will be placed in Parliament on Tuesday, he said. The import duty on gold now is eight per cent.

The minister announced these proposals to keep the CAD at a three-year low of 3.7 per cent of gross domestic product (GDP) in 2013-14, bolstered by the lower trade deficit of June and July. "If the CAD is contained at $70 billion, it will amount to 3.7 per cent of GDP," Chidambaram said in a statement in the Lok Sabha.

FISCAL MATH

Measures to fetch an additional $11 bn to check the burgeoning CAD & arrest rupee fall

• $4 bn IRFC, PFC and IIFCL to be allowed to raise together through quasi-sovereign bonds for infrastructure sector needs
• $4 bn PSU oil companies to be allowed to raise external commercial borrowings
• $2 bn Gains expected from liberalisation of ECB norms
• $1 bn Gains expected from liberalisation of non-resident deposit schemes

The CAD had touched a record 4.8 per cent in 2012-13. In absolute terms, it was $88.2 billion. GDP is projected to be $1.89 trillion this financial year (assuming the rupee at 60 against a dollar). At this rate, $70 billion works out to 3.69 per cent of GDP. If GDP falls, the CAD in percentage terms would go up. The deficit estimate has been made on the basis of projections for exports and imports and the trade deficit this year.

Chidambaram said gold imports were likely to fall to 850 metric tonnes this financial year from 950 metric tonnes in 2012-13. He hoped that fall in gold and oil imports would save the economy $1.5 billion.

The government would ask public sector financial institutions Power Finance Corporation, India Infrastructure Finance Company Ltd and India Railway Finance Corporation to go for a quasi-sovereign bond to fund long-term infrastructure needs and to ask oil companies to raise ECB. He said oil PSUs and PSU financial institutions would raise $4 billion a year this way. The rate on dollar-denominated non-resident Indian deposits, or foreign currency non-resident deposits, is being de-regulated, the finance minister said, adding the Reserve Bank of India (RBI) would also issue a circular to allow Indian subsidiaries of multinational companies to raise funds through ECB. The minister said liberalisation of ECB norms and non-resident deposit schemes would fetch $2 billion to the exchequer.

As measures were taken to narrow the CAD, the finance minister said there was a need to do more to contain the deficit, reduce volatility in the currency market and to stabilise the rupee. In 2011-12, the government had to draw foreign exchange reserves of $12.8 billion to finance the CAD. "Last year, we had a larger CAD at $88.2 billion. Nevertheless, we were able to fully and safely finance the CAD, and do even better. We added $3.8 billion to the reserves," he said, adding there could be a small accretion to foreign exchange reserves this year.

The rupee has depreciated 12 per cent against the dollar since the beginning of this financial year. It closed at 61.28 on Monday.

It had hit an all-time closing low of 61.30 against the dollar last Wednesday. Depreciation of the rupee also means lower GDP in dollar terms, which would magnify any given absolute number of the CAD.

After touching $17.8 billion in April and $20.14 billion in May, the trade deficit fell drastically to $12.3 billion in June and $12.3 billion in July. Even then, it widened to $62.5 billion in the first four months of the current financial year, against $59.7 billion in the corresponding period of the previous year.