India, the world's No. 1 gold buyer, plans to double its duty on imports of the precious metal in its second such move this year, according to reports Friday. Gold prices fell nearly 1 percent.
The government, which is struggling to contain a budget deficit estimated at 3.6 percent of gross domestic product this fiscal year, the Wall Street Journal said.
Finance Minister Pranab Mukherjee disclosed the plan Thursday in parliament as he presented the budget for the 12 months beginning in April.
One of the primary drivers of the current-account deficit has been the growth of almost 50 percent in imports of gold and other precious metals in the first three quarters of this [fiscal] year, Mukherjee said.
India, which imported a record 969 metric tons last year, raised its gold import duty 90 percent on Jan. 17.
I have been advised to strengthen the steps already taken to check this trend, Mukherjee said.
The increased duty aims to curb an outflow of U.S. dollars due to rising imports, the Journal said.
India's annual gold demand could fall more than 30 percent to 600 tons after the tax increase, said Prithviraj Kothari, the Bombay Bullion Association's president.
Rajesh Mehta, chairman of Rajesh Exports Ltd., a Bangalore-based gold jewelry-exporter and retailer and Bachhraj Bamalwa, chairman of the All India Gems and Jewellery Trade Federation, warned the increased gold import duty will increase smuggling in a country where gold jewelry is culturally essential.
In addition to the cultural necessity, Indians see physical gold or bullion, as a normal part of an individual's investment portfolio.
The fundamental reasons for buying gold jewelry are unchanged, Ajay Mitra, managing director for Middle East and India at the World Gold Council, told Bloomberg News. They are rooted in Indian culture and weddings. Investment demand is driven by the need to protect against inflation, ease of liquidity and the increasing use of gold as a monetized asset to secure loans.
The move wasn't a complete surprise and not all analysts expect its impact to be extreme.
Gold's reaction to recent changes in India's import duties have been limited, Edel Tully, an analyst at UBS AG, said in a Wednesday note. Given the absence of strong physical demand of late plus the fact that gold is currently trading in no-man's land without clear upside drivers, its price may be more reactive to stricter import duties than in the past.
Word of the increased duty helped slash the price of gold Friday on the Comex to $1,644.20 per troy ounce from $1,659.50.
The government also plans to double the current 2 percent import duty on platinum.