India is launching another attack on gold imports in an effort to slash its bulging current account deficit. The tactic — hiking the country's import duty rate — is one the government has used before. This time, the rate was increased from 4 percent to 6 percent.
At the beginning of the year, India's finance minister, P. Chidambaram, warned that the duty on gold imports would likely be raised, Reuters reported. On Monday, when the news broke that the decision had been finalized, the impact on gold prices was immediate. "Gold prices shot up by Rs 315 [approximately US$5.86] to Rs 31,250 [$581.78] per 10 grams and markets sources say it may go up to Rs 700 [$13] per 10 grams in the short term," an article in The Financial Express states. India has gone from a flat rate — which amounted to about 1.1 percent of gold prices at the end of 2011, according to a report by GFMS analyst Sudheesh Nambiath — to the current import duty of 6 percent in the span of year. Indian gold demand in 2012 proved to be a disappointment for many market participants. The year began with expectations that India would be in tight competition with China for the title of world's largest gold consumer, but ultimately India was a weak competitor. With a year to adjust to the new reality, some foresaw Indian demand making a healthy comeback in 2013. But the Indian government has now made the metal even more expensive, and there is a lack of consensus as to the impact that this action will have. “The hike in duty will only lead to large scale smuggling and loss of revenue for the government. An increase of Rs 60 per gram will not drive away imports,” said Mohit Kamboj, president of the Bombay Bullion Association (BBA).