Will Higher Taxes Dampen Demand For Gold?

Source: india.blogs.nytimes.com

By VIKAS BAJAJ

Indian officials have turned to an old tool to help it rein in its twin deficits in trade and the federal budget: higher import duties on gold and silver.

The government said on Tuesday that it will now charge a flat 2 percent duty on gold and a 6 percent duty on silver imports. That works out to almost twice the 300 rupees (about $6) per 10 grams of gold and 1,500 rupees per kilogram of silver it charged before this change. The government estimates that additional duties should net it as much as 6 billion rupees ($117 million) in additional revenue.

The increase appears to be designed to help bring down India’s import bill – gold and silver imports totaled $35 billion in the last fiscal year, about 10 percent of total imports — while raising money to help offset rising government spending on welfare programs, analysts say. Another hope is that it will help in stemming the fall in the Indian rupee, which tumbled at the end of last year but has recovered a little bit so far this year as the government has moved to improve flows of dollars into the country.

To some, including the editors of the financial newspaper Mint, the decision harkens back to the period between the 1960s and 1980s, when India strictly regulated imports of precious metals and, for a time, even prohibited consumers from owning gold. Those restrictive policies gave rise to smugglers who would land skiffs loaded by gold and other contraband late at night on beaches in and near Mumbai. Smuggling became so prevalent that many Bollywood movies of that era featured smugglers as central characters.

Traders point out that the demand for gold, for jewelry in particular, is so strong in India that the higher duties may not have much of an impact. After all, India imported 867 tons of gold in 2011, up from 534 tons in 2000, according to a report by Citigroup, even as gold prices jumped from more than $200 a troy ounce to more than $1,600 a troy ounce.

India is the world’s largest importer of gold and its households have the largest stash of the metal, according to the World Gold Council, which represents the gold mining industry, though Chinese households appear to be catching up in their purchases of gold.

In both China and India, analysts and jewelers will tell you, gold is seen as alluring for cultural reasons. But, perhaps more importantly, gold is seen as a safe haven that will better ensure the value of family savings than a bank account or a volatile stock market would during periods of high inflation and economic uncertainty.

Economic theory and how people behave in real life suggests that higher import duties may bring demand down marginally. But if policymakers really want to have an impact on how much gold families hoard in their safes and safe-deposit boxes, they would probably be better off focusing on bringing down inflation and improving the economy.

http://india.blogs.nytimes.com/2012/01/19/will-higher-taxes-dampen-demand-for-gold/