Indian Gold Imports Could Fall 25% on Duty Hike

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India's gold imports could drop by up to a quarter this year if, as expected, the government again raises the duty on the precious metal, the chairman of the All India Gems and Jewellery Trade Federation said on Thursday.

Bachhraj Bamalwa said he believes import duty on gold will be hiked to 6 percent in the budget scheduled for Feb. 28. The rate was doubled to 4 percent last as part of moves to cut India's trade deficit.

"Going by the government's attitude towards gold and the Reserve Bank of India's latest recommendations, we fear gold imports will be further curtailed by at least 20-25 percent compared to last year," he said in an interview with the Reuters Global Gold Forum.

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"The increase in duty will make gold costlier in India, and at this price investors will not be interested in gold, keeping in mind that the Indian rupee is also constantly weakening."

India's finance minister P. Chidambaram reignited speculation for another duty hike earlier this month, hinting at cutting gold imports to resolve a record current account deficit that he referred to as "worrying".

Gold is often used as an investment asset by Indians, but represents a drain on foreign currency reserves. A senior finance ministry official told Reuters the government could increase the import duty on gold by 1-2 percentage points.

The most active gold contract on the Multi Commodity Exchange outperformed a 10 percent rise in spot gold last year to climb nearly 13 percent, hitting a series of record highs above 32,000 rupees per 10 grams. If the government also presses ahead with plans for bullion-backed paper investment products such as gold bonds, and a controversial proposed tax amnesty on such investments, imports could fall much further, by 60-70 percent, Bamalwa added.

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Bamalwa said amnesty schemes could bring out gold held by Indian household for generations, estimated at between 20,000-25,000 tonnes of metal.

India's gold imports are estimated by the Bombay Bullion Association in November to have fallen by as much as 42-45 percent in 2012 to around 532 tonnes after the doubling of import duty on gold.

Jewellery Demand Light

India is the world's biggest gold consumer, with a jewellery industry estimated to be worth $200 billion a year. Bamalwa said jewellery demand had been light so far this year, though the advent of the wedding season in mid-January was likely to lift sales.

Bamalwa said attempts by the government to wean Indian consumers off using gold as a store of value were unlikely to make much headway in the country.

"The majority of gold purchases in India come from rural part of the country, and many (buyers) do not even have a bank account," he said. "The villagers have neither knowledge nor belief in other financial instruments, like stocks."

"Indian appetite for gold is not going to die overnight," he said. "But if gold is allowed to be imported into India through illegitimate channels, it is going to create problem in the gold industry."

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Jewellers went on strike across India last March after the government unveiled a 0.3 percent excise levy on unbranded jewellery and a tax on transactions worth more than 200,000 rupees. Bamalwa said it was unlikely that such action would be repeated this year.

"Our concern is to restrict smuggling activity, which is the government's job," he said. "Last time the industry went on strike (it was) due to the imposition of excise duty on jewellery, for which the industry is not ready."