New Delhi:
India’s steep new tax on gold imports doesn’t deter Mousumi Rao as she holds up a glittering $5,000 filigree necklace that could adorn her daughter on her wedding day. Rao’s daughter isn’t getting married next month or even next year. The 12-year-old is at least several years away from her wedding.
“I’m collecting things for her now so when she grows older and marries, I should have enough gold for her,” said Rao. “It is very auspicious for us, one of the most auspicious things, to give gold to your daughter.”
Last year Indians imported 864 tons of gold, about one-fifth of world sales. The cost of 2.5 trillion rupees ($45 billion) was second only to India’s bill for imported oil. The unquenchable appetite for gold coins, bars and jewellery has swelled India’s trade deficit and weakened its currency, making crucial imports such as fuel more expensive.
The government can’t do much about oil imports — without fuel, the economy would grind to a halt — so in the past year it has tried to rein in gold demand, raising the import duty three times in a year to its current level of 6 per cent. The higher tariff is proving little match for age-old tradition.
“Every Indian wants gold. Now is the wedding season, and I’m seeing an increase in demand no matter about the tax,” said jeweller Arun Kaigaonkar. “Prices have been rising for years, and still people buy.”
He said not only jewellery, but gold bars and coins remain in high demand because in many rural areas banking is less available. “In the countryside, people save their money only in gold.”
In early 2011, an ounce of gold cost about $1,375 on the world market, or nearly Rs62,000 inside India at the exchange rate at the time.
It now costs over $1,600 an ounce but the drop in the rupee against the dollar means the cost in India has risen by an even greater extent, to about Rs 90,000.
The rising price does reduce demand but each festival and wedding season brings sales back up again.
Industry experts say there are signs that higher import taxes have encouraged smuggling, which hasn’t been a problem since India lifted strict gold controls more than 20 years ago.
“India is not only the world’s biggest importer of gold, it’s the biggest hoarder of gold,” said Albert Cheng, a managing director of the World Gold Council, which estimates there are some 18,000 tons of gold locked up in bank vaults and family homes around the country.
Samiran Chakraborty, an economist with Standard Chartered Bank in Mumbai, said, such “non-productive” gold in India is worth some $1 trillion, about half of India’s GDP.
The government recently stopped requiring gold-backed exchange-traded funds to hold physical gold in the amount of their sales. Instead, the funds will be allowed to deposit some gold with banks who in turn can lend it to jewellers, which in theory should reduce imports for a time.
“Up to now, both jewellers and ETF’s have been driving the rise in import demand. Now, maybe they can start to cancel each other out,” Chakraborty said. The funds have combined assets of about $1.8 billion, a small proportion of India’s gold purchases, so progress might be slow.
