Lessons from the Raj: Whether it is gold or salt, higher duties don't work

The government recently increased the import duty on gold from 10.75 per cent to 15 per cent. It has done this to check the current account deficit, which has been rising alarmingly.

Gold imports have risen massively over the last 14 months. In May this year, 107 tonnes gold was imported, and imports were also massive in June. The May surge was nearly 800 per cent. There is no rational explanation for this.

But among the many side effects has been increasing pressure on the rupee, which has been depreciating rapidly against the dollar, forcing the Reserve Bank of India (RBI) to take countermeasures earlier this week. It doesn’t seem to have succeeded.

If history is anything to go by, higher duty rates will not make much difference. Imports will only go below the customs radar, i.e. smuggling will increase.

And in this context, I want to tell a story that goes back to the 1860s. It concerns smuggling, too, but of something which you’d never have thought of — salt. Yes, salt, over the tax on which there was such a big fuss in 1929. Gandhiji had led that famous campaign.

Salt tax in India started — hold your breath — during Chandragupta Maurya’s time. It was low till the East India Company raised the rate a hundred-fold. The Company and its employees were the primary beneficiaries of a few billion pounds over the 100 years from 1760.

So, people started smuggling salt from the Indian states into Company controlled territory. This went on till 1860, when the British government took over the governance of India.

Someone then suggested that it build a barrier to prevent smuggling. Since such a long wall — 2,300 miles — was impossible to build, it decided to build a long hedge. Yes, hedge.

When finally done, it was 20 feet deep in some places and about that high as well. It also had watch towers and little forts along the way. At its peak, the hedge ran all the way from Multan to Bihar. It was known as parmat lane (permit line). Some of it still exists. An English writer called Moxam found it about 20 years ago and wrote a book about it.

The hedge solution was abandoned after just 11 years (1879-80). And guess who made it work during that time? None other than the founder of the Congress party, an ICS officer, Allan Octavian Hume. 

I have told this extraordinary story at some length because when the demand for something is high and fairly inelastic, neither high taxes nor enormous physical barriers can prevent smuggling. America discovered this in the 1930s when it imposed prohibition.

India has struggled with gold since the 1950s. All governments have failed to dampen the demand for gold. In 1992, the government went the opposite way: it increased its legal supply, and that increased its demand.

The best explanation for this gold demand came in 1981 from a well-known journalist and editor. He wrote that the demand for mangal sutra made it such a big problem. India sees around 8 million Hindu weddings every year. Heaven knows how much gold is purchased for them.

So, India imports gold — it produces just a few kilos — the way Europe imports gas and America imports oil. The short point is that the problem — of gas in Europe, oil in the US and gold in India — is a lifestyle problem. High taxes and import duties aren’t going to solve it.