Gold plays a crucial role in India’s financial ecosystem, with its value closely approaching the country’s GDP. Traditionally viewed as a secure investment and collateral against economic uncertainty, recent gold policy developments indicate a trend towards stability after years of fiscal intervention.
The government’s policy over the past decade has focused on reconciling three key objectives: moderating gold imports, formalizing the gold market, and fostering financial alternatives to physical gold. While past measures, such as increased import duties during economic crises, were effective short-term solutions, they led to adverse outcomes like smuggling. In contrast, recent reductions in import duties signify a shift towards improving compliance and transparency within the market.
Despite a year-on-year import increase, gold volumes have dropped significantly, indicating a decline in actual consumption largely due to price increases rather than a surge in demand. Historically, economists have been critical of gold, seeing it as economically unproductive.
To enhance India’s position in the global gold market, further reductions in customs duties are advisable. Aligning domestic prices with global rates could curb distortions and encourage market development. Recommendations from the Committee on Capital Account Convertibility advocate for liberalized trade, efficient market creation, and increased financial instrument availability linked to gold.
For India to evolve from a price taker to a price influencer, it must prioritize establishing a freer market, mobilizing household gold towards productive avenues, and rethinking revenue collection strategies. The focus should be on integrating gold into the financial system through instruments like ETFs, potentially supported by favorable tax policies.
However, reforms require timely implementation to seize the opportunity for a leadership role in global gold markets. The impending budget announcement is anticipated to clarify the direction of these policies.
