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Finance Minister P Chidambaram said today the government was unlikely to raise the import tax on gold further to avoid gold smuggling and would instead introduce inflation-indexed instruments to help curb a record current account deficit.
In January, India raised the import tax on gold to six per cent to curb purchases.
Its passion for gold, seen by many as a hedge against high inflation, has led to a rise in its current account deficit, which reached an all-time high of 6.7 percent of gross domestic product in the December quarter.
“We did raise tariffs from four percent to six percent, but there are limits to which tariffs can be raised on gold, because if you raise tariffs prohibitively, gold smuggling will increase," Chidambaram told Reuters.
India vies with China as the top global consumer of gold, and with nearly all demand covered by imports, the country's purchases are a major factor in global prices.
"Creating inflation-hedged financial instruments is a way out to reduce dependence on imports of gold. The Reserve Bank of India (RBI) and the government are working on inflation-proof, inflation-indexed instruments," he said.
The Indian economy, mired by the global slowdown and stubbornly high inflation, probably grew around five percent in the business year ended on March 31, the slowest pace in a decade.
Govt will argue for lowering of rates by RBI
The government will continue to argue for lowering of interest rates by RBI in the backdrop of softening of headline inflation and the need to promote economic growth, Chidambaram said today. “The RBI has to weigh the fact that headline inflation has come down yet consumer price inflation is sticky...It has to keep current account deficit in mind before it lowers interest rate.”
"But government is always pro growth and the government will always argue for lower interest rates", he said in an interview to CNBC
