India Raises Import Duty on Gold and Platinum

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Jun. 7 – In an attempt to slow the country’s consumption of imported metals, India’s Ministry of Finance raised the import duty on gold and platinum this week from 6 to 8 percent. The change came after the demand for gold jumped 13 percent last month, putting further strain on the country’s current account deficit (CAD).

As a net importer of gold and oil, India has seen its CAD grow over the past several years. In the fourth quarter of 2012, the CAD reached its highest level, accounting for 6.7 percent of the country’s GDP. The large CAD has been a worry for economists who believe the state of India’s current account may jeopardize the country’s economy.

“The biggest risk to the economy stems from the CAD which, last year, was historically the highest,” said Reserve Bank of India Governor Duvvuri Subbarao.

A current account deficit is created when a country imports more than it exports, causing the country to be a net debtor internationally. The Indian government has been targeting the import of gold as a way to slow the country’s growing current account deficit.

India is the world’s largest consumer of gold, yet the country must import a large quantity to meet consumer demand. In May alone, India imported 162 tonnes of gold.

Last month, the Reserve Bank of India set in place new regulations to restrict the sale of gold on consignment basis to banks from foreign dealers. The changes made this week also extend these restrictions to other gold dealers in India, with the exception of dealers acquiring the metal for jewelry export.

“The government is taking a hard line trying to curb the country’s appetite for gold,” commented a UBS representative.

Following the increase in India’s gold import duty, the world gold market sold off over worries that the largest consumer of the metal would be forced to lower its demand for gold imports.

Gold has a strong cultural presence in India as a status symbol and preferred gift, often used at weddings and religious festivals to sign good fortune. Indians have also increasingly viewed gold as a store of value equal to that of other currencies.

“If India sneezes, the gold industry will catch a cold,” says Managing Director of the World Gold Council Ajay Mitra.

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