Gold duty hike to check discretionary imports, prioritise forex use: Sources

New Delhi, May 13 (PTI) The government’s decision to hike import duty on gold to 15 per cent is aimed at checking discretionary imports and prioritise forex towards essential imports like crude oil, fertilisers, industrial raw materials and capital goods that directly support economic activity and food security, sources said on Wednesday.

Effective May 13, import duty on gold and silver has been increased from 6 per cent to 15 per cent and that on platinum has been raised from 6.4 per cent to 15.4 per cent. Consequential changes have also been made to other items such as gold/silver dore, coins, findings, etc.

Sources said through this measure, the government seeks to “prudently manage emerging risks and reduce vulnerability to potential external

shocks before pressures on current account intensify further” “amid extraordinary” external conditions.

India’s foreign exchange reserves have declined to USD 690 billion in the week ended May 1 from an all-time high of USD 728.49 billion during the week ended February 27 before the outbreak of the West Asia war which has put pressure on the rupee through costlier imports.

According to the RBI data for the week ended May 1, India’s foreign currency assets (FCAs), which form the largest component in Forex reserves, fell to USD 551.8 billion, while gold reserves fell to USD 115 billion.

“India’s foreign exchange resources must be prioritised towards essential imports such as crude oil, fertilisers, industrial raw materials, defence requirements, critical technologies, and capital goods. These imports directly support economic activity, food security, infrastructure, manufacturing, exports, and national security,” a source said.

In contrast, precious metals, while culturally and financially significant, are predominantly consumption and investment driven in nature. Such imports involve substantial outflow of foreign exchange.

“Therefore, during periods of external stress, measured moderation of discretionary imports may contribute significantly to overall macro-economic stability and prudent external-sector management,” a source said.

The war in West Asia and the effective blockade of the Strait of Hormuz has raised prices of crude oil and food, fertiliser imports. Brent crude prices have jumped from about USD 73/ barrel level prevailing before the war started on February 28, to around USD 107/barrel. It had touched a 4-year high of USD 126/barrel on April 30.

India imports 87 per cent of its crude requirement, of which 46 per cent transits through or near the Strait of Hormuz, where the seven-day moving average tanker traffic has fallen to five vessels. 60 per cent of India’s LPG is imported, over 90 per cent via the Gulf. Besides, 38 per cent of annual remittances originate in Gulf countries.

Government sources said the duty increase is a “preventive measure” amid “extraordinary external conditions” and a signal of prudent economic governance. It reflects India’s proactive response to emerging external risks through targeted interventions, thereby reducing the need for more disruptive corrective measures at a later stage.

“Further, rather than resorting to quantitative restrictions or more severe import-management tools, the approach relies on moderate price-based disincentives that preserve market flexibility and consumer choice,” a source said.

The increase in customs duty on precious metals is intended to moderate avoidable import demand and ease pressure on the external account, sources said, adding it is a “calibrated and proportionate intervention” designed to encourage moderation in non-essential imports at a time when external vulnerabilities remain elevated.

As per various estimates, India’s current account deficit (CAD), which happens when total imports of goods, service exceed its total exports and income receipts from abroad, is likely to rise to about 1.3 per cent of GDP from about 0.8 per cent in FY26.

In such circumstances, prudent management of the country’s external sector becomes essential, the source said.

India is the world’s second-biggest gold consumer after China. The imports are largely driven by the jewellery industry.

Historically, customs duty adjustments have been used as one of several policy instruments to support macro-economic stability and effectively manage CAD-related pressures during periods of global volatility.

India had in 2022, raised gold import tax to 15 per cent to check CAD amid a falling rupee due to the Russia-Ukraine war that began in February 2022.

Thereafter, in the Union Budget 2024-25, where customs duties on gold and silver were reduced from 15 per cent to 6 per cent, and on platinum from 15.4 per cent to 6.4 per cent, reflecting a more comfortable macroeconomic and external-sector position at the time. PTI JD DR DR