Tariff Imposed on Gold in India- Sumer Lulla

Analyse and evaluate the impact of any major protectionist measure undertaken by the country allocated to you. (India)

Tariffs, also known as custom duties, are taxes on imported goods and are the most common form of trade protectionism. Tariffs are imposed to help protect domestic industries from foreign competition as well as to raise government revenue.[1]

The government of India imposes tariffs on various luxury goods like gold and the value of tariff imposed on this good is revised every fortnight based on the global prices for these goods. The government determined import tariff value is the customs duty charged on imported goods to protect domestic producers from foreign competition.

On September 1^st 2015, the government raised the import tariff value on gold to $369 per 10 grams based on trends of prices for gold in the global market.[2] Gold is the second largest import for India and to protect the domestic gold producers from foreign producers, the government has raised the tariff duty on gold. Also the increase in tariff duty on gold will lead to an increase in government revenue as the government will be earning a higher import duty per good imported into the country.

Previously, in the second fortnight of August the import tariff value on gold was $363 per 10 grams whereas the price of gold was $1134.40 an ounce. However, on the 1^st of September, the global prices of gold rose by 0.75% to $1142.90 an ounce and the import tariff value rose to $369 per 10 grams. Meanwhile, in the domestic market, gold was priced at Rs 27,060 per 10 grams or $1517.40 per ounce.[3]

                                  Graph 1 showing Impact of tariff on imports of goods.[4]

The world price for gold is $1142.90 whereas the tariffs being levied on gold by the Indian government is $369. The domestic price being charged for gold is $1517.40 which is higher than the world price as well as the World price plus the tariff being imposed on gold. In the graph above, at the world price, quantity Q₁ is being produced by domestic producers whereas quantity Q₄ is the demand by the domestic consumers. Thus, at the world price, the imports of gold are Q₄-Q₁. After the imposition of the tariff, the domestic supply rises to Q₂ and the domestic demand falls to Q_3­. The amount of gold imported falls to Q₃-Q₂. Also, there is a dead weight loss to society of parts labelled 'd' and 'f' in the graph above.

The domestic producers benefit as they produce more gold and receive a higher price for their gold. Domestic consumers suffer as there is less gold available in the market and thus they are forced to pay a higher price than the world price for the gold. The government of India benefits as it receives a tariff revenue equal to ‘e’ in the graph. Also, there is an increase in domestic employment as the domestic sellers are now producing a larger quantity of gold. However, there is a negative effect on the income distribution in the country and income distribution worsens as tariffs are regressive taxes. A regressive tax burdens people on lower incomes proportionately more than people on higher incomes.[5] Furthermore, productive inefficiency increases as tariffs help protect relatively inefficient producers in the country. Meanwhile, foreign producers of gold are worse off as their quantity of exports decrease and thus their revenues decrease.

Due to the high tariffs being charged on Gold by the Indian government, there is a global misallocation of resources and society as a whole is worse off. Domestic producers are better off as they sell more quantities of gold at higher prices whereas consumers are worse off as less gold is available and at higher prices. The fluctuation in the prices of gold help set the tariff charged on gold and in this way the government helps protect the domestic producers of gold as well as increase its own revenue.

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[1] Economics for the IB Diploma Second Edition- Ellie Tragakes

[2] http://economictimes.indiatimes.com/news/economy/foreign-trade/government-raises-import-tariff-on-gold-to-369-per-10-grams/articleshow/48759199.cms

[3] http://economictimes.indiatimes.com/news/economy/foreign-trade/government-raises-import-tariff-on-gold-to-369-per-10-grams/articleshow/48759199.cms

[4] Economics for the IB Diploma Second Edition- Ellie Tragakes

[5] Economics for the IB Diploma Second Edition- Ellie Tragakes