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India Gold Demand

Tax Doesn't Deter Imports


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By Erik Neilson
Friday, February 22nd, 2013

It’s no secret that the thirst for gold in India is nothing short of enormous. Already the largest importer of gold in the world, the Indian government’s efforts to curb gold imports has been ineffective thus far. While India faces a growing current account deficit (CAD), demand for gold rose sharply by 41% just in the last quarter of 2012. 

India spends more money on imported gold than anywhere else in the world. Just last year, the country spent 2.5 trillion rupees (or $45 billion) on 864 tons of gold—one-fifth of the world supply, according to BusinessWeek.

This was second only to the amount of money the country spent on oil last year, and it has swelled their trade deficit to a dramatic extent. As a result, India’s currency has been weakened, which makes it more difficult for the country to focus on necessary imports such as fuel. 

According to Business Standard, the World Gold Council’s statistics show that demand for gold in India had risen from 185.5 tons (4th quarter 2011) to 262 tons in just a year’s time. 

In order to curb the growing demand for gold in India, the government has imposed a steep tax on gold bars, bullion, and jewelry. While one might assume this would have an impact on demand, it has been ineffective thus far, as Indians continue to have a strong thirst for gold despite the year-to-year rising prices.

It’s difficult to equate the price of gold in American dollars to that of Indian rupees. Gold prices have risen in this country as well as throughout the rest of the world, but given the fact that the rupee has lost value against the dollar, Indians experience an even more dramatic hike each time there is a price increase.

Add to this the strict taxes put in place by the Indian government in order to repair the economy, and it becomes more clear from an outside perspective just how much Indians are willing to spend on gold in whatever form it may be.

Gold is a very important aspect of Indian culture and has been for many thousands of years. The precious metal is a central piece in weddings, for example, and family heirlooms very often incorporate gold in one way or another as well. Nevertheless, it has had nothing but a negative impact on the country’s economy, which has been rife with widespread poverty for a great deal of time.

It doesn’t stop at symbolism, however. Gold is also purchased in India as a way for people to protect themselves against inflation. Since inflation is a major problem for many people in India, it’s not uncommon for citizens to hoard gold as a form of safeguard against rising costs in the economy. The problem here is that by doing this, the Indian economy is actually weakened in comparison to what it would be if gold imports were lessened, hence the government’s tax efforts.

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The tax is not perfect, however. While it has helped to curb demand throughout certain parts of the year, the thirst for gold in India skyrockets repeatedly during festival and wedding seasons.

High gold taxes have also been thought to contribute to new smuggling efforts as well, which haven’t been a problem in India since the country lifted controls upon gold imports over twenty years ago.

While it’s not easy to find a comprehensive solution to the issue of over-importing gold, one potentially helpful method would be to facilitate redistribution of gold that is already located in the country.

India is certainly the world’s leading importer of gold, but it also happens to be one of the world’s biggest hoarders. According to BusinessWeek, the country is home to $1 trillion in “non-productive” (re: hoarded) gold, which accounts for half of India’s GDP. 

For years, jewelers and other importers have done everything they can to raise the demand for gold by importing it into the country. Given the fact that there is so much gold already in India, however, they may be able to use these resources to cancel out other imports, effectively helping to strengthen the currency in India. 

It’s unclear as to what the future for gold imports in India will be. Tax hikes can certainly help to curb demand at least slightly, but the importance of gold in Indian culture is not likely to lessen anytime soon.


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