Anyone following the Indian economy and capital markets has been witness to what is the worst case outcome for a modern-day central banker: on one hand forced to keep inflation down, on the other fighting a fierce capital outflow which recently shocked Rupee holders by send the currency to all time lows against the dollar and sending gold priced in INR to record highs. All of this is, of course, happening as India fights tooth and nail to keep its monthly trade deficit under control, not overpay for oil, and keep businesses running now that inflation expectations are becoming unanchored. And, as we have reported previously, the biggest scapegoat to the Indian central bank and government is, understandably, gold, which has been the source of much of the population's "wealth preservation" currency outflow.
As a result, India has unleashed the most unprecedented series of gold "capital controls" ever seen in a modern nation, shy of confiscation (and even that may be imminent [8]). Today, India added yet another more measure to its list of prohibitions that seek to minimize the size of the gold market available to citizens, yet which will only result in even more interest and demand in the yellow metal. As Reuters reports, India increased its import duty on gold jewellery from 10 percent to 15 percent, setting it higher than the duty on raw gold in a move to protect the domestic jewellery industry.
Why is the government doing this? Simple: "To protect the interests of small artisans, the customs duty on articles of jewellery ... is being increased," the ministry said.
Somehow we doubt the ministry actually cares about the small artisans as much as it cares about making gold imports even more prohibitive and which only serve to exacerbate the country's current account deficit, which in turn will inevitably result in even more USD-outflows, INR weakness, economic and market instability, more central bank intervention, the eventual selling of Treasury bonds, more gold purchases, and so on.
More on today's latest capital control move from Reuters [9]:
The government has also curbed raw gold imports through measures including three duty hikes this year to a record 10 percent. The central bank has put tight restrictions on importers that have sharply curtailed supplies.
India imported gold jewellery worth $137.57 million between April and July - a fraction of overall bullion imports, which were valued at $2.9 billion in July alone.
The world's biggest buyer of bullion, India imported a record 162 tonnes in May, creating a headache for the government which is trying to rein in a wide current account deficit and support a weak rupee.
Gold is the biggest non-essential item in India's import bill although jewellery is a tiny fraction of the purchases.
The hike in the duty on jewellery was demanded by the domestic industry on concerns over imports of cheaper jewellery from Thailand, Malaysia and elsewhere.
"This is a good move for the local industry and it will support the manufacturing sector," said Haresh Soni, chairman of the All India Gems and Jewellery Trade Federation.
So while this latest escalation in the fight of one particular central bank with gold will merely lead to the next, we can now update our list of all capital control actions taken by India in 2013 alone, which now looks as follows.
- Jan 21 - The government raises the gold import duty by 2% to 6%.
- Jan 22 - The government more than doubles the duty on raw gold to 5%.
- Jan 30 - Finance Minister P. Chidambaram says there are no plans for additional taxes or curbs on gold imports.
- Feb 1 - The Reserve Bank of India (RBI) plans to introduce three or four gold-linked products in the next few months.
- Feb 6 - The RBI says it would consider imposing value and quantity restrictions on gold imports by banks.
- Feb 14 - The central bank relaxes rules on gold deposit schemes offered by banks by allowing lenders to offer the products with shorter maturities.
- Feb 20 - The Trade Ministry recommends suspending cheaper gold jewellery imports from Thailand.
- Feb 28 - India keeps its gold import duty unchanged in its annual national budget, defying industry expectations.
- Feb 28 - India proposes a transaction tax of 0.01% on nonagricultural futures contracts, including for precious metals.
- March 1 - The Finance Minister appeals to people not to buy so much gold.
- March 18 - The Reserve Bank of India says it is examining banks that sell gold coins and wealth management products to identify "systemic issues", with a view to closing any legal loopholes.
- April 2 - The Finance Ministry suggests it is unlikely to raise the import tax on gold further to avoid smuggling and would instead introduce inflation-indexed instruments.
- May 3 - The RBI restricts the import of gold on a consignment basis by banks.
- June 3 - The Finance Minister says India cannot afford high levels of gold imports and may review its import policy.
- June 5 - India hikes the gold import duty by a third, to 8%.
- June 21 - Reliance Capital halts gold sales and investments in its gold-backed funds.
- June 24 - India's biggest jewellers' association asks members to stop selling gold bars and coins, about 35% of their business.
- July 10 - India's jewellers announce they might continue a voluntary ban on sales of gold coins and bars for six months.
- July 22 - The RBI moves to tighten gold imports again, making them dependent on export volumes, but offers relief to domestic sellers by lifting restrictions on credit deals.
- July 31 - India hopes to contain gold imports well below the 845 tonnes that were shipped last year, the Finance Minister says.
- Aug 13 - India hikes the import duty on gold for a third time in 2013, to 10%. Duties for silver and platinum are also increased to 10%. The customs duty on gold ore bars, ore, and concentrate are increased to 8% from 6%.
- Aug 14 - India turns the screws on gold buying again, banning imports of coins and medallions and making domestic buyers pay cash.
- Aug 29 - India considers plan to allow commercial banks to buy gold direct from ordinary citizens
- Sept 19 - India hikes import duty on gold jewerly to 15%