Indian Gold Imports May Spike Before Tariffs Rise

January 3rd, 2013 by

The government of India is considering new import tariffs on gold in order to combat a record current account deficit that it blames on its citizens’ appetite for the yellow metal, which may spark a run on gold before the new taxes take effect. India is the largest gold importer in the world, in large part due to the long-held tradition of giving heavy gold jewelry and coins as wedding gifts. Some estimates put jewelry and gold wedding gifts as comprising over 60% of total gold imports.

The Indian government considers the growing current account deficit a serious problem, as the Indian Finance Minister Palaniappan Chidambaram stated in a press conference: “We may be left with no choice but to make it a little more expensive to import gold. The matter is under the government’s consideration.” Deputy Governor of the Reserve Bank of India, Subir Gokarn, blames gold imports for approximately 80% of the nation’s current-accounts deficit.

India already raised import duties on gold last March, doubling the fee for standard gold bars from 2% ot 4%, and raising the tariff for other gold to 10%. While this blunted demand in the first half of  2012, demand surged in the latter half due to a weakening dollar lowering the price of gold in rupees, and the start of the festival and wedding season.

Current discussions in the Indian government are around gradually increasing the good delivery bar tariff to 6%. When asked about the increase in gold smuggling that this measure would cause, the finance minister replied “May be some smuggling has taken place but whatever level of duty, there is always smuggling.”

The weakening rupee has only encouraged the long-standing tradition among Indians of hoarding gold, a trend no one sees ending. Some estimates put total private gold holdings, in bars, coins, and jewelry, at nearly $1 trillion, a number equal to half of India’s GDP.

by David Peterson