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Millennium Post

All that glitters is... Gold

The maturity of India’s policy formulation process is stamped in what P Chidambaram called as the last budget of the United Progressive Alliance (UPA)-II government. Smartly the government has made the budget as a communication tool, an event which media dissects and disseminates ad infinitum. Read the budget speech, look closely at the body language of the expert communicator and one will agree with the uncanny communication process that goes into the making of the budget. Ask anybody the opinion on the budget and the answer will be in the positive.

What were the most hyped factors before the budget? Taxation on the rich was one. Chidambaram has delivered the message for the common man by imposing a ten per cent surcharge on the top 42,800 tax payers having taxable income of Rs 1 crore or more. Effectively this is just three per cent increase and will not pinch the pockets of the tax payer. At the same time the government has exhibited it is poll bound face.

The other much hyped issue had been on checking the runaway demand for gold import. Several reports including one from an expert committee of the Reserve Bank of India (RBI) were published on the need to check the demand for gold. It looked singularly responsible for India’s huge current account deficit (CAD). In January the government raised import duty on processed gold by two per cent – from four to six per cent. All expected stringent measures in the budget. Instead there was pleasant news of increase in the baggage allowance for Indians returning with gold ornaments bought abroad.

While media and analysts who get their one day dose of fame by commenting on the CFO of the government the politician in the minister knows well how to use that to the government’s advantage. Gold is consumed in India cutting across socio-economic barriers. In fact the emotional attachment of the gold varies inversely with the economic condition of the consumer. Predictably the minister did not want to hurt the sentiment of the majority who buy gold compelled at times by the social pressure. The import duty hike came two months before the budget, like in case of railway where fares rose but before the railway budget.

The other critical lesson the government has left for analysts is that the government knows well the pros and cons of the economy. That CAD is not merely created due to import of gold is a factor the policy-makers know even without anybody telling them. Evidently demand for gold looked disproportionate since saving in financial instruments fell sharply. The solution lies in creating attractive saving instruments. The proposed inflation-indexed instruments to be formulated by the banking regulator RBI and also sale of tax free bonds for infrastructure sector are two options to be tried.  In addition the finance minister announced more liberalisation of the Rajiv Gandhi Equity Saving Scheme (RGESS). The scheme is expected to attract small and medium pockets to the stock market. Rajiv Gandhi Equity Savings Scheme will be liberalised to enable the first time investor to invest in mutual funds as well as listed shares and one can do so, not in one year alone, but in three successive years. 'The income limit will be raised from Rs 10, 00,000 to Rs 12, 00,000', said Chidambaram. The budget proposals contained one welcome message for gems and jewellery sector. Duty on perform of precious stones has been reduced from the existing 10 to 2 per cent. The move is aimed at providing incentive to exports of jewellery from India. The duty reduction on precious stones was necessary to revive the sentiments of the jewelry sector. Also one must note that the sector employs a large number of artisans who have no other skills. The fall in exports has been impacting their livelihood.

Widely expected restrictive measure on trade in jewellery also did not find any place in the budget. The imposition of Prevention of Money Laundering Act does not form part of the budgetary process.

Naturally there is no mention of the same. The authorities can notify the limit over which a jewellery buyer must furnish identification document.

What is in store now? There will be several steps from the government and the RBI on attracting depositors to financial instruments, making gold deposit schemes popular with a view to converting gold deposit to financial instruments. One can also expect vigorous monitoring of the gold market including high-value jewellery transactions so as to curb use of illegal channels of trade.

Nobody can fault the government for not being pragmatic and sensitive. On gold the job has been well done. (IPA)
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