India Hikes Gold Import Duties To Record 10 Percent As It Struggles With Record Trade Deficit

The Indian government on Tuesday hiked the import duty on gold to a record 10 percent, the third hike in eight months, as officials fight a record trade deficit by curbing gold imports, Reuters reported.

Gold imports to India, the world’s largest gold consumer, fell in June to $2.45 billion, after tax hikes and restricted supply apparently lowered demand.

But imports in July rose again to $2.9 billion, signaling that India's consumers weren’t too unsettled by the government’s policies.

Last year India imported 845 metric tons, a figure likely to be surpassed this year by escalating demand for physical gold in China. From April to June 2013, India imported 335.5 tons.

India’s finance ministry raised import duties to 10 percent from 8 percent.

India Finance Minister Shri Chidambaram told Parliament on Monday that the government had previously drawn on fiscal reserves of $12.8 billion to finance the current account deficit from 2011 to 2012.

“We believe that we have to do more to contain the CAD [current account deficit], to reduce volatility in the currency market and to stabilize the rupee,” Chidambaram said to lawmakers.

He said silver import duties will be raised and the government would curb other non-essential imports, besides seeking to lower demand for oil, India’s largest import.

Import duties on silver had been raised to 10 percent from 6 percent previously.

It’s unclear if the government’s policies will help curb imports and cut its trade deficit.

Haresh Soni, chair of the All India Gems and Jewellery Trade Federation, told Reuters: “Our main suggestion to the government has been that increasing [the] import duty wouldn’t solve our problem of the current account deficit and imports.”

He cited lesser import volumes after a 2 percent duty on gold was imposed, and greater import volumes despite greater import tax hikes.

Commodities analyst Victor Thianpiriya, with the Australia and New Zealand Banking Group (ASX:ANZ) in Singapore, said the tax hike could make illegal purchases more common.

“This could increase smuggling and further push up domestic premiums that are already at record levels,” he told Reuters.

Barclays PLC (LON:BARC) analysts wrote in a research note on Monday that local gold premiums have remained high, with a notable shortage of local metal.

Importers have been more unwilling to send gold into India, because of a lack of regulatory clarity, the analysts wrote.