Tejinder Narang
In short criminality/ corruption
is promoted as duties or stringent curbs are enforced, no increase in revenues,
rupee weakens further, and inflationary pressure builds up coupled with erosion
of savings and assets value.
India’s
finance ministry has been progressively increasing import duty on gold to
manage pressure on rising CAD—likely to be about 6% of GDP by December2013.
Since last one-year duty component has gone up from 2% to 10%. Banks and
authorised agencies have been mandated to ensure 100% margin money from Bullion dealers.
Will the duty hike be an arbitrary exercise? Can Government further push
duty to virtual ban on bullion imports?
The apparent
reason given by the Government is to reduce the import of Gold to reduce CAD to
shore up the value of Indian Rupee against US Dollar.
Price
of 10gms of gold in international market is about Rs.25000/- {$1300/troy
oz – (1300*61/32)}. In India it costs Rs.30000 or about $1560/ troy oz. – An arbitrage of Rs.5000/- of 20% (for 10gms). For one Kg of gold the same arbitrage will be Rs. 5 Lacs ($8300). If the duty is increased to 20%
the spread between international and Indian price will be Rs.10 Lacs ($16600)
and will be further amplified to Rs 25 lacs ($42000) for 50% duty.
The
increase in custom duty on Gold and Silver may have following effects:
1
CRIMINALITY AND CORRUPTION
Grey channels
become more lucrative. Therefore the Government is cautious in raising the
custom duty beyond a point. Media reports already indicate of accelerated
illegal flows of gold through land/sea routes of Pakistan, Sri Lanka and also
through air ports in India. Apart from transactions in grey market it
also encourages criminality both in society and corruption in Government
channels.
2
NOTIONAL REVENUE
According to
a newspaper report, Government will be richer by Rs.5, 000 crores ($820
million) by the current round of increase in duty on gold and silver. It will
be an absolutely flawed (foolish) understanding of economic realities and
Indian greed for acquisition of gold if one were to presume that revenue will
rise to Rs. 25,000 crores ($3.3billion) when duty is raised to 20% and by Rs.
100,000 crores($13billion) with 50% hike.
May be 80%-90%
of gold import will go underground and any revenue
earnings will be notional. More the suppression of import, the greater
will be the reaction for the illegal flows.
3
RUPEE WEAKENS WITH MORE DUTY
Demand of
USD in parallel market (in Dubai, Pakistan, Sri Lanka) for import of gold will
intensify. Market rate of $/Rs will be higher say Rs 65-66 as against official
rate of Rs 60. This will automatically lead to pressure on the official
exchange rate as well, which is exactly opposite of what the Government is attempting now—to shore up the rupee.
Ultimately market and official rates must merge.
4
SAVINGS/ASSETS VANISH
There is a report on website “Colorado Gold”
written by “Don Stot” dated 15th July 2013 which explains that the
printed money is a root cause of world’s current account deficit. It is
invisibly killing financial assets through slow process of suicide fueled by
fire of inflation. Read the contents of the report and introspect.
“All the world is economically self-destructing, thanks
to the world's total usage of un-backed paper currencies, which are being
printed to pay various government foolish welfare, purchases and
spending. America, Japan, Portugal, Ireland, Spain, Greece, The
Netherlands, etc, are all doing what the Japanese call 'hari-kiri,' and we
spell it hari kari, but it means suicide, and in the economic sense, a very
slow one. Universal, un-backed money, spent foolishly, as all governments
are want to do, is universal taxation on everyone, because all monies
continually lose purchasing power due to inflation. How can it end?
I have no crystal ball, but all the signs, point to disaster. Maybe not
in my lifetime, I'm 79, but eventually. Gold and silver have been real money throughout all of
history, in all nations, and are self valued, in spite of governments and
bankers manipulating them, which can't go on forever. “
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