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Gold industry fears India tax hike

Hike in import duty to cut current account deficit

Image Credit: EPA
An increase in tax may deter jewellery buyers and investorsduring India’s festival season, which starts this month.
Gulf News

Mumbai: India, the largest gold buyer, may raise an import duty for a third time this year to curb purchases and reduce a record current-account deficit, according to industry executives, who said an increase would hurt demand.

“The government may look at increasing the duty to 7.5 per cent,” Prithviraj Kothari, president of the Bombay Bullion Association, said in a phone interview. D.S. Malik, a finance ministry spokesman in New Delhi, declined to comment.

The tax on bars and coins was doubled to 4 per cent in March after imports jumped to a record 969 metric tonnes in 2011. A further increase may deter jewellery buyers and investors during India’s festival season, which starts this month, as a decline in the rupee against the dollar boosts domestic gold prices to an all-time high. Imports plunged 42 per cent to 340 tonnes in the first half, according to the producer-funded World Gold Council.

“Any increase in duty will play havoc on the industry,” said Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation. “The industry is grappling with high gold prices and demand is slow.”

Gold priced in dollars has risen 8.2 per cent this year, supported by investor demand as central banks may add stimulus to support the recovery. Immediate-delivery bullion, which reached a record $1,921.15 an ounce in September last year, traded at $1,692.50 an ounce at 12:06pm in Singapore.

Curbing shipments of gold will help the country to narrow the current-account deficit as the drop in rupee boosts the cost of crude-oil purchases, according to the finance ministry. The shortfall widened to a record 4.2 per cent of the gross domestic product in the year ended March from 2.7 per cent in 2010-2011.

The rise in the deficit, the broadest measure of trade, was due to slower exports and so-called relatively inelastic imports of petroleum products, gold and silver amid a rally in global prices, Finance Minister P. Chidambaram said on August 23.

“A hike in duty is not the solution,” said Kothari at the bullion association. “Any such move will hit demand in a big way.” India first increased the import duty on gold to 2 per cent on January 17 from a fixed rate of Rs300 (Dh20) per 10 grams.

Prime Minister Manmohan Singh is seeking to rein in the current-account deficit as the economy expanded 5.5 per cent in the three months through June from a year earlier, close to the three-year low of 5.3 per cent in the first quarter. Gold and silver, the second-largest import component after oil, accounted for 12.5 per cent of imports last year, trade ministry data show.

“The basic fear is that gold will again become a very good investment option and physical demand may rise, putting pressure on the trade deficit,” said Madan Sabnavis, Mumbai-based chief economist at Credit Analysis and Research Ltd. “We need to take action since we don’t have any system of restricting the quantity of gold that can be imported.”

Bullion futures in Mumbai surged to a record of Rs31,487 per 10 grams yesterday after the rupee fell about 17 per cent against the dollar in the past 12 months. Gold for October delivery gained 0.5 per cent to 31,449 rupees grams on the Multi Commodity Exchange of India Ltd. yesterday. Futures in India have gained 14.6 per cent this year.

India’s imports may decline by 250 tonnes to 350 tonnes this year as record prices cut demand, Jeremy East, global head of metals trading at Standard Chartered Plc, said on August 25. Consumption fell to 933.4 tonnes last year from a record 963.1 tonnes in 2010, according to the council.