Bullion Industry Says India May Raise Import Tax to Cut Deficit By Swansy Afonso - Sep 4, 2012

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 percent,” 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 percent in March after imports jumped to a record 969 metric tons in 2011. A further increase may deter jewelry 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 percent to 340 tons 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 percent 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 $1,691.65 an ounce at 8:20 a.m. in Singapore.

Record Deficit

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 percent of the gross domestic product in the year ended March from 2.7 percent 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 Aug. 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 percent on Jan. 17 from a fixed rate of 300 rupees per 10 grams.
Prime Minister Manmohan Singh is seeking to rein in the current-account deficit as the economy expanded 5.5 percent in the three months through June from a year earlier, close to the three-year low of 5.3 percent in the first quarter. Gold and silver, the second-largest import component after oil, accounted for 12.5 percent of imports last year, trade ministry data show.

‘Take Action’

“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 31,487 rupees ($566) per 10 grams yesterday after the rupee fell about 17 percent against the dollar in the past 12 months. Gold for October delivery gained 0.5 percent to 31,449 rupees grams on the Multi Commodity Exchange of India Ltd. yesterday. Futures in India have gained 14.6 percent this year.
India’s imports may decline by 250 tons to 350 tons this year as record prices cut demand, Jeremy East, global head of metals trading at Standard Chartered Plc, said on Aug. 25. Consumption fell to 933.4 tons last year from a record 963.1 tons in 2010, according to the council.
To contact the reporter on this story: Swansy Afonso in Mumbai at safonso2@bloomberg.net
To contact the editor responsible for this story: Jake Lloyd-Smith at jlloydsmith@bloomberg.net