India Boosts Gold Import Tax to Curb Record Deficit, Demand

India, the world’s largest gold buyer, increased a tax on bullion imports to curb a record current-account deficit at a time when the World Gold Council predicts an all-time high quarterly demand for the metal.

The duty will rise to 8 percent from 6 percent, effective immediately, Revenue Secretary Sumit Bose said in a telephone interview yesterday in New Delhi. Before the move, India had tripled the tax since January last year. Gold imports may fall as much as 20 percent this year, the All India Gems & Jewellery Trade Federation said. The levy on platinum imports was also increased to 8 percent from 6 percent.

Gold’s slump to a two-year low in April boosted demand for jewelry from Asia. Yesterday’s step is the latest by India to curb the appetite for the metal among the nation’s 1.2 billion population, for uses ranging from wedding jewelry to a hedge against consumer-price inflation. Such demand contributed to a $32.6 billion current-account gap in the last quarter of 2012, equivalent to a record 6.7 percent of gross domestic product.

“Physical demand at these sort of price levels is still very strong and the Indian government wants to curb imports,” Robin Bhar, an analyst at Societe Generale SA in London, said by phone. “It will have an impact on demand because already we’re seeing a whole raft of restrictions announced.”

Prices Drop

Gold for immediate delivery was little changed at $1,404.14 an ounce at 4:42 p.m. in Mumbai, down 16 percent in dollar terms this year compared with a 10 percent drop in rupees. The dollar price reached a two-year low of $1,321.95 on April 16 after rallying for the past 12 years in the longest bull run in at least nine decades. Futures in Mumbai jumped 2.2 percent yesterday, the most in six weeks, and were little changed today at 27,692 rupees per 10 grams ($1,515.262 an ounce).

India’s gold imports will be 300 to 400 metric tons in the second quarter, almost half of total shipments for all of last year, the London-based World Gold Council said in a May 29 report. Inward shipments may decline by as much as 20 percent in 2013 after the increased levy, Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, said by telephone from Kolkata.

The rupee has weakened about 4.6 percent against the dollar in the past month, the most in a basket of 11 Asian currencies tracked by Bloomberg. The drop threatens to stoke price pressures that may curb the Reserve Bank of India’s scope to extend monetary easing and counter the slowest economic growth in a decade.

Chidambaram’s Appeal

Gold imports aren’t sustainable and India must curtail them, Finance Minister Palaniappan Chidambaram said in a speech in Mumbai today. He urged banks to refrain from encouraging purchases of the metal and said the country’s overall economic situation isn’t very promising, with investment still weak.

The government this week sold inflation-linked bonds for the first time in 15 years, to provide investors with an alternative to gold as a buffer against inflation.

Wholesale prices rose 4.9 percent in April from a year earlier, a 41-month low, while the consumer-inflation index climbed 9.4 percent.

The nation had already widened curbs on imports on June 4. Restrictions on overseas purchases by banks on a consignment basis will be expanded to include state-run trading companies and others authorized to directly import gold, the RBI said.

A levy on gold ore, concentrate and so-called dore bars for refining was increased to 6 percent from 4 percent, and an excise tax on refined gold will climb to 7 percent from 5 percent, the Finance Ministry said in a statement.

“The government is taking a hard line trying to curb the country’s appetite for gold,” UBS AG wrote yesterday in a report, before the announcement. “This poses a risk for Indian gold demand up ahead. While this is unlikely to put an end to traditional gold buying in India, a more expensive gold price in rupee terms should have a negative impact on overall volumes. An unintended consequence of increasing difficulties in importing gold would be a potential increase in unofficial flows.”

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