The recent measures suggested by the Finance Ministry and the Reserve Bank of India will be a step in wrong direction and will encourage gold smuggling, industry experts said on Thursday.
In a draft paper prepared by the RBI seeking public opinion until January 18, the banking regulator has proposed a financial instrument linked to gold to curb the demand of its physical holding.
Similarly, the Finance Ministry has proposed to raise import duty on gold to 6 per cent after raising the same fourfold last year.
"At the proposed duty, importers would have to pay $120 for an ounce of imported gold at the current prevailing price.
"Hence, India's importers would prefer to bring physical gold through an unofficial route.
This means, the government is encouraging gold smuggling," said Rajan Venkatesh, Managing Director (India Bullion), ScotiaMocatta, one of the largest gold suppliers in India.
He added that many customers in West Bengal have complained about large-scale gold smuggling currently happening through Bangladesh.
"A further increase in import duty would escalate the situation further.
"This will also reduce the government's tax collection through gold imports," he added.
But, the finance ministry believes that the swelling Current Account Deficit could be curbed through restricting physical import of gold in India.
In 2011-12, India's CAD rose to 4.2 per cent of the Gross Domestic Product, mainly on account of higher gold imports and less capital inflows.
Gold import in 2011-12 rose to $62 billion, as compared to$43 billion in the previous year.
Rangarajan estimated the CAD to come down to 3.5 per cent of GDP in November.
"Why does'nt the government come out with a more competitive instrument with returns higher than gold ?" asked Ashok Minawala, an industry veteran.
Currently, around 25,000 tonnes of gold is held by Indian households which needs to come out.
"Instead of curbing gold imports in India, the governments of China and the United States are encouraging individuals to possess more gold.
"Hence, the government must understand that gold is not a liability but an asset which makes its holder wealthier," said Minawala.
Standard gold price rose Rs.65 to close on Thursday at Rs.30,795 per 10 grams while silver ended the day with Rs 200 up at Rs 59,050 a kilogram.