Record Gold Imports Impact India’s Trade Deficit

India’s gold imports reached a historic peak in November 2024. This surge has affected the trade deficit and the value of the rupee. The imports totalled $14.9 billion, a staggering increase from the monthly average of $3.8 billion. Gold now represents 21.2% of India’s total merchandise imports, overtaking crude petroleum for the first time. This article explores the implications of this trend and the underlying factors contributing to it.

Surge in Gold Imports

In November 2024, gold imports surged by 331.4% compared to November 2023. This increase has widened the trade deficit, which has put downward pressure on the rupee. The rupee has depreciated against the US dollar, making imports more expensive and exacerbating the current account deficit.

Tariff Cuts and Investor Behaviour

The reduction of import tariffs from 15% to 6% in the recent budget has stimulated gold imports. Lower tariffs have made domestic gold prices more competitive. Investors are turning to gold as a safer investment amid volatile stock markets. Demand for gold coins and jewellery has surged, especially during the festive and wedding seasons.

India-UAE Trade Agreement

The Comprehensive Economic Partnership Agreement (CEPA) with the UAE has further facilitated gold imports. This agreement allows low-duty access to gold, silver, and platinum. Gold is minimally processed in Dubai before being imported to India, increasing the volume of gold entering the country.

Alternative Import Routes

Gold enters India through various unconventional channels. For instance, gold in platinum alloys is imported under CEPA. These alloys can contain up to 98% gold and are classified as platinum, allowing for duty-free access. Gold compounds from Japan and jewellery from Indonesia are also imported under free trade agreements. These alternative routes inflate the actual gold import figures beyond official statistics.

Data Integrity Concerns

There are concerns about the accuracy of gold import data. Some gold imported via Special Economic Zones (SEZs) may have been double-counted. Only gold officially recorded at Customs is considered an import. Internal movements within the country do not qualify as imports and should not be included in the data.

Recommendations for Future Trade Policies

India’s experience with the CEPA marks the risks associated with tariff concessions on precious metals. Such imports can disproportionately affect the trade deficit and foreign exchange reserves. It is advisable for India to refrain from granting tariff cuts on precious metals in future free trade agreements.

Questions for UPSC:

1. Critically analyse the impact of gold imports on India’s trade deficit and currency value.
2. What are the implications of the Comprehensive Economic Partnership Agreement on India’s import policies? Discuss.
3. Explain the role of alternative import routes in inflating gold import statistics in India.
4. What are the potential risks associated with tariff concessions on precious metals in free trade agreements? Provide examples.

Answer Hints:

1. Critically analyse the impact of gold imports on India’s trade deficit and currency value.

1. Gold imports surged to $14.9 billion in November 2024, representing 21.2% of total merchandise imports.
2. The trade deficit widened , leading to downward pressure on the rupee.
3. The rupee depreciated against the US dollar, increasing import costs and worsening the current account deficit.
4. Excluding gold, merchandise imports grew only by 6.7%, indicating gold’s disproportionate impact.
5. The spike in gold imports is linked to investor behavior favoring gold amid stock market volatility.

2. What are the implications of the Comprehensive Economic Partnership Agreement on India’s import policies? Discuss.

1. The CEPA with the UAE allows low-duty access to gold, silver, and platinum, facilitating increased imports.
2. Gold is minimally processed in Dubai, allowing it to qualify for CEPA norms before entering India.
3. India’s import tariffs on precious metals were reduced from 15% to 6%, encouraging legal imports.
4. The agreement may lead to long-term tariff reductions, potentially impacting domestic industries.
5. India’s government is considering reviewing the CEPA to manage the surge in imports effectively.

3. Explain the role of alternative import routes in inflating gold import statistics in India.

1. Gold enters India through unconventional channels like platinum alloys and compounds from Japan.
2. Platinum alloys with high gold content are classified as platinum, allowing duty-free import under CEPA.
3. Jewellery from Indonesia benefits from tariff-free access under ASEAN-India FTA, inflating import numbers.
4. These alternative routes bypass traditional customs data, leading to discrepancies in official statistics.
5. The Reserve Bank of India also imports gold under capital accounts, further complicating import data accuracy.

4. What are the potential risks associated with tariff concessions on precious metals in free trade agreements? Provide examples.

1. Tariff concessions on precious metals can worsen the trade deficit, impacting economic stability.
2. High-value, low-volume imports like gold disproportionately affect foreign exchange reserves.
3. The CEPA with the UAE exemplifies how duty cuts can lead to surging imports that strain trade balances.
4. Such concessions may encourage speculative trading and increase volatility in the gold market.
5. India’s experience suggests the need for careful consideration before granting similar concessions in future FTAs.