Clipped from: https://www.thehindubusinessline.com/opinion/editorial/editorial-mind-the-gap/article69000728.ece
Gold imports have spurted as a fallout of IndiaтАЩs May 2022 free trade agreement with the UAE, which allows duty-free imports of gold, silver, platinum and diamonds
The latest trade data for eight months of FY25 point to a big jump in the trade deficit, largely on account of two factors тАФ the runaway rise in gold imports and the fall in petroleum exports. As a result, the April-November trade deficit (goods and services) was up 19.4 per cent to $83 billion.
Gold imports were up 49.8 per cent in dollar terms and accounted for over 10 per cent of all imports. It is notable that in November alone gold imports surged 331 per cent to $14.9 billion, accounting for over a fifth of total imports. On the exports front, petroleum products were down 19 per cent in eight months (16 per cent of total exports) and 50 per cent in November alone, dragging down overall exports. As a result of these twin, outsize disruptions, the November trade deficit was up 185 per cent to $19.8 billion. While petroleum exports have fallen on account of global factors such as tepid demand, weak prices and supply disruptions, the rise in gold imports is a matter of policy concern тАФ given its repercussions on the current account deficit (CAD) and the rupee. Other exports and imports are in line with the trend. Consultancy firm, Global Trade Research Initiative, points out that if gold imports in November are netted out, overall imports would have risen by 6.7 per cent instead of 27 per cent.
Gold imports have spurted as a fallout of IndiaтАЩs May 2022 free trade agreement with the UAE, which allows duty-free imports of gold, silver, platinum and diamonds. They increased from $347 million in FY23 to $1.35 billion in FY24, a jump of 290 per cent. The trend seems to have continued into this fiscal for a variety of reasons. Under the FTA with UAE, a calibrated reduction in duties on precious metals was agreed upon. The government reduced overall duties this year from 15 per cent to 6 per cent to remove arbitrage and sourcing through UAE. While it is possible that gold smuggling has come down as a result of the duty elimination or cuts, an elevated demand for gold┬аper se┬аcould impact the rupee, which has already been under stress on account of foreign portfolio outflows in October and November. At 1.1 per cent in September-end, the CAD does not pose a worry now, but rising gold imports and financial flows would be on the Reserve Bank of IndiaтАЩs radar.
Analysts have pointed out that precious metals should be excluded from future FTAs for their impact on macroeconomic stability. India has rightly asked for a review of these concessions with the UAE. As for broader export patterns in India, there has been a diversification away from traditional exports such as textiles, apparel and leather towards electronics, machinery, computers, pharmaceuticals and automobiles where тАШglobal value chainsтАЩ are in place. While this diversification is to be welcomed, the import intensity of exports has increased. Apart from developing domestic value addition, traditional industries need to be freed of constraints that weaken their competitiveness.
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