The Central government has increased the basic import duty on gold to 12.5%, up from the previous 7.5.
New Delhi: The Central government has increased the basic import duty on gold to 12.5%, up from the previous 7.5%, the government said on Friday (July 1). With the move, India, which is the second-largest consumer of precious metal, is aiming to reduce its demand. The move will also help the government to bring down the trade deficit. At present, India meets most of its gold demand via imports that are putting pressure on the rupee which hit a record low early in the day.
The duty increase would raise prices and moderate demand in India, potentially weighing on global prices. However, it may stoke under-the-counter buying and increase demand for precious metals smuggled into the country, according to trade officials quoted in a report by Reuters.
“The sudden rise in prices could bring down jewellery demand this month,” Prithviraj Kothari, managing director of RiddiSiddhi Bullions, told the media agency.
Following the duty increase, dealers were offering discounts of up to $40 per ounce off official domestic prices, inclusive of the 12.5 per cent import and 3 per cent sales taxes.
The May trade deficit in India increased to $24.29 billion from $6.53 billion a year ago. Gold imports increased to a whopping $6 billion in May 2022 from a mere 678 million in the same period last year.
Short-term gold demand may fall, but long-term demand will remain strong and imports will rebound, according to Surendra Mehta, secretary of the India Bullion and Jewellers Association (IBJA).
Following the announcement of the increase in duties, local gold prices jumped around 3%. On the other hand, global prices fell 0.5% on the news, according to a Reuters report.
According to a Mumbai-based dealer with a global trading firm, the hike has increased the gap between local and overseas prices to more than 15%, which could increase gold smuggling in the country. “Smuggling decreased after duty reductions and COVID-19 restrictions on people movement. However, it may now rise again,” the dealer was quoted as saying.
