India, Largest Gold Buyer, Raises Import Tax to Cut Deficit

India, the world’s largest bullion buyer, raised taxes on gold imports to reduce a record current-account deficit and moderate demand for the precious metal that’s rallied for 12 straight years.

The duty on gold and platinum imports will rise to 6 percent immediately from 4 percent, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi today. The tariff will be reviewed if imports moderate, he said. Gold was 0.2 percent higher after the announcement.

Increased taxes may reduce gold demand in Asia’s third-largest economy after prices jumped 7.1 percent in 2012 as investors and central banks boost purchases. About 80 percent of India’s current-account deficit, the broadest measure of trade, tracking goods, services and investment income, is due to gold imports, according to the Reserve Bank of India.

“Consumption and imports will fall definitely,” Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation, said in a phone interview from Kolkata. “This will also help the government reduce the current-account deficit.”

Gold for immediate delivery climbed to $1,687.90 an ounce by 3:01 p.m. in London. Platinum jumped 0.5 percent to $1,677 an ounce.

Standard Chartered Plc said earlier this month that its gold shipments to India soared on mounting concern the duty would be raised. Expectations for the tax increase helped boost premiums in Asia by as much as 50 percent since mid-December, Australia & New Zealand Banking Group Ltd. said Jan. 4.

Gold Shipments

“There was a pretty clear sign that people were anticipating something was going to happen and trying to bring in some gold beforehand,” said Dan Smith, an analyst at Standard Chartered in London. “The appetite for gold is so ingrained in India, it probably won’t have too much of a dramatic impact.”

Domestic mutual funds, which offer gold-backed exchange traded funds, will be allowed to deposit part of the bullion they hold with banks to boost availability for jewelry and gem making, Mayaram said.

“The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewelry trade,” Mayaram said. “It is hoped that consequently there will be a moderation in the quantity of gold that is imported into the country.”

India’s Demand

Last March, India doubled the tax on purchases of gold bars and coins to help narrow the current-account gap. Demand for gold still picked up “significantly” in the July-to-September quarter, the Reserve Bank of India said in its biannual Financial Stability report in December.

The current-account deficit widened to $22.3 billion in the three months to Sept. 30 as a faltering global economy hurt exports, the central bank said Dec. 31. The rupee lost 3.5 percent last year, falling to a record low of 57.3275 against the dollar as bullion imports widened the current account deficit to an all-time high.

Gold imports are “a huge drain,” Finance Minister Palaniappan Chidambaram said Jan. 2. Imports by India rose for the first time in five quarters in the three months to Sept. 30, according to the World Gold Council. Purchases jumped 9 percent to 223 metric tons in the third quarter of 2012 from 205 tons a year earlier, the producer-funded group said Nov. 15.

Demand Slides

Still, the country’s demand slid 28 percent in the 12 months through September, as jewelers held a strike in March and April to protest taxes on imports and as local prices surged to an all-time high, according to the council, which ranked India as the biggest buyer in the period. Higher taxes and domestic prices will again be a drag on physical demand this year, said Joni Teves, an analyst at UBS AG in London.

Bullion in Mumbai surged to a record 32,464 rupees ($604) per 10 grams (0.35 ounce) on Nov. 26 and gained 13 percent last year. The contract for February delivery rose 0.5 percent to 30,724 rupees on the Multi Commodity Exchange of India Ltd.

“In India, people have more belief that gold is the best commodity they can invest in,” said Mohit Kamboj, president of the Bombay Bullion Association. “The increase in duty is too small. The tax won’t impact imports and it will only help increase government’s revenue.”

Buying gold is considered auspicious during religious festivals and weddings in India. The festival season starts in August and ends in November, and is followed by the wedding season.

“The interesting thing will be whether demand holds up now this has actually been announced,” Standard Chartered’s Smith said. “We saw a temporary surge. Maybe we’re going see a bit of weakness now that the implementation has come through,” he said, referring to bullion imports.

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