Widening trade deficit pushes India to disincentivize gold imports

India is experiencing a widening trade deficit, this essentially means that it is buying more goods and services than it is shipping out. India’s trade deficit widened to a record $25.63 billion in June 2022, whereas it stood at $70.25 billion during April-June quarter.

As a response to this, the Central government decided to raise the import duty on gold — a major good that the country heavily imports to meet its rising domestic demand. The move is intended to disincentive imports into the country amidst the trade deficit.

The Centre raised the basic import duty on gold from 7.5 per cent to 12.5 per cent effective July 1.

“There has been a sudden surge in imports of gold. In the month of May, a total of 107 tonnes of gold was imported and in June also the imports have been significant. The surge in gold imports is putting pressure on the current account deficit,” a statement by the Ministry of Finance said.

High trade deficits are a cause for concern as they could lower the value of the domestic currency. The value of the rupee has been consistently been at its all-time low.

The country’s forex reserves had dropped for the third consecutive week, barring a rise during the past week, on account of the Reserve Bank of India’s likely intervention in the market to defend the depreciating rupee.

Typically, the RBI intervenes in the market through liquidity management, including through selling of dollars, with a view to preventing a steep depreciation in the rupee.

During the preceding three weeks, the country’s forex reserves had dropped persistently and it slumped by $10.785 billion cumulatively.

Further, the high crude oil prices globally, which India imports on a large scale, along with supply chain disruptions with the onset of the pandemic have also contributed to the widening of the trade deficit.

The US Fed’s tightening of monetary policy is also putting pressure on the rupee’s value against the US dollar. As a cumulative result of all such factors, the Indian trade balance is being impacted.