India's gold import duty makes smuggling a temptation

India Dispatch: India's increased import duty on gold is expected to prompt more smuggling of the precious metal into the country.

A family looks at a display of gold jewellery in Bangalore. India's government increased the import duty on gold to curb high demand. Manjunath Kiran / AFP

India's increased import duty on gold is expected to prompt more smuggling of the precious metal into the country.

The government this week increased the import duty on gold to 6 per cent from 4 per cent in a move intended to curb the high demand that has been a significant factor in the country's gaping current account deficit.

"If this is imposed strictly it will lead to illegal smuggling of gold," said Chetan Dhakan, the owner of National Jewellery, a gold trader in Dubai's Gold Souq in Deira. "People always find a way to move gold."

India's government also took a series of steps last year to try to reduce gold imports, including an earlier increase in the import duty and banning banks from lending money to customers to buy gold.

"Gold demand has risen as a hedge against inflation," said analysts at Nomura. "Therefore, we think imposing import duty will likely only shift gold imports from official to unofficial channels as it tackles the symptom, not the cause."

Nomura expects the total value of gold imports to fall to US$44 billion (Dh161.61bn) in the financial year starting in April compared with an estimated $48.3bn in the present period.

"Given India's penchant for gold for weddings and other religious ceremonies, a sharp fall in volumes is unlikely, in our view," said Nomura.

Bhargava Vaidya, a gold analyst at BN Vaidya & Associates in Mumbai, said: "In case this duty keeps on rising you may have some imports coming through some illegal channels."

Gold prices hit record highs in India last year as the rupee weakened against the US dollar. The country was the world's largest consumer of gold in 2011, but China is believed to have overtaken it last year.

Imports of gold reached 223.1 tonnes in the third quarter of this year, up 9 per cent from a year earlier, according to the World Gold Council. India accounted for 30 per cent of global consumer demand for gold.

"The impact on India's imports will be limited as a more important factor in determining gold demand is the strength of the rupee and therefore the value of gold in rupee terms," said Jeffrey Rhodes, the chief executive and global head of precious metals at INTL FCStone in Dubai. "A stronger rupee means a lower gold price and increased demand for gold. Dubai has always been an important gold centre for India. It's likely to have some impact, but I'm not certain how much." Mr Vaidya also believes that imports of the precious metal will not be affected significantly.

"Indians will still consume gold. The demand for this particular commodity is almost price inelastic," he said. Others believe it could have a short-term effect.

"Gold has arrived as an investment product in India along with the traditional jewellery demand," said Priti Gupta, the executive director of commodities and currencies at AnandRathi Financial Services. "The hike in duty will add revenue to the exchequer and will bring down the imports only in the medium term, which will help in narrowing the fiscal deficit in the immediate term. The duty has been raised to 6 per cent from 1 per cent in just one year."

Some jewellers also said that they expected an impact. Dheeraj Jain, the co-owner of Surana Gold, a jewellery shop in Mumbai, said that customers were already being put off by the high prices of gold.

"The cost will be passed on to the customer in the end," said Mr Jain. "Higher prices will mean fewer customers."