Earlier this week, the Indian government raised the import tariff values on gold and silver. The tariff value was previously $388 per 10 grams of gold and $487 per kilogram of silver.
The new higher tariff value will be set at $399 per 10 grams of gold and $495 per kilogram of silver.
To be clear, this is not the tariff itself, but the amount that customs uses to determine a base price to prevent under-invoicing. Otherwise, importers would claim to pay far less for gold and silver imports in order to pay a smaller tariff.
The Indian government has been playing these games for several years now. The whole idea of a tax on gold and silver imports is ridiculous. The politicians say they want to curb imports of the metals due to the high trade deficit.
In other words, the central planners believe they know how to better manage people’s lives, which is after all what makes them central planners.
These taxes on precious metal imports are all the more daunting for a country that is known for its desire to hold gold. While India is filled with poverty and overall low living standards, gold is the shining light of the Indian economy. It is one of the few sources of property rights and monetary stability.
To be sure, the tax – which is what a tariff is – is there for control and, of course, more government revenue. In addition, gold is symbolic as a hedge against government. We say it is a hedge against disaster, but most of the disasters are brought on by government policy.
India is known to have an unstable currency. The central bank creates money out of thin air like all central banks, but the economy there has never been strong. The money creation is not backed up by production and price inflation tends to run high. Precious metals are a means of protection against a depreciating currency.
Trade Deficits Don’t Matter
The worst thing about this whole thing is that the Indian government is doing great harm to the people. They say they want to narrow the trade deficit. But in this case, the Indian people are actually trying to import gold, which is a far better form of money than any junk issued by the Indian central bank.
The only way to import gold honestly is by sending goods or services outside the country. Sure, money is used in the process, but people outside of India have little desire for accumulating huge piles of rupees. The Indians themselves barely want to accumulate rupees.
The only reason that a trade deficit would matter is because the Indian government is running up its debt load. In this sense, the government should try to reduce the trade deficit, not by making it more expensive to import gold, but by reducing its spending.
Aside from this, there is nothing wrong with having a so-called trade deficit because there really is no deficit. It is not as if one country is giving away goods and services to another country.
There is always a trade, unless we are talking charity. The trade may be money on one side and goods and services on the other. But that just reflects the preferences of either side.
A trade deficit is defined as when a country’s imports exceed its exports. But why should anyone be bothered by importing more goods and services? The only reason is because it fits in with the increasing government debt that is owed to others. If it is between private parties, then why would it matter?
New York City has a huge trade deficit, but this doesn’t seem to bother anyone there because it doesn’t involve international borders. Should people in New York City start farming and manufacturing goods in order to reduce its trade deficit?
Any tariff is bad enough because it makes life more expensive for consumers, which is everyone. But this tariff on gold in particular is especially bad because it is discouraging people from owning one of the few assets that can protect the people against their own government’s reckless policies.
The Indian government has also enacted these gold schemes in an attempt to get people to turn over their gold to the government for interest payments. The central planners really are trying their best to not allow people to protect themselves financially.
Like any government program, there will be unintended consequences. We can be sure that there is a lot of gold smuggling going on in India as we speak. People find a way to get around these barriers. Perhaps it will just lead to more demand for gold by Indians in the long run.
Still, I can’t emphasize enough that the general population of India is allowing this to happen. If the people did not consent to it, then it would go away. It is not that people are approving of these measures, but they are obviously not strongly opposing them either.
In the U.S. we have our own set of issues. But Americans tend not to worry about the trade deficit too much. Some worry about the budget deficit, which they should. At this point in time, Americans don’t have to worry about import tariffs on gold. But we have enough other taxes to worry about.