India on Edge
|Anjana Pasricha||January 26th 2013|
India has raised taxes on gold imports to dampen the country’s huge appetite for the yellow metal. The country’s massive imports of gold - the highest in the world - are straining India’s finances.
Shobha Dhir will marginally cut back on the gold jewelry she plans to make for her daughter’s wedding later this year. Prices of the precious metal jumped by 13 percent last year, and a recent hike in taxes on imported gold will make the earrings, bangles and necklaces she plans to buy even more expensive.
Dhir says she will have to make some adjustments in the quantity of gold she buys, but has no option for gifting jewelry to her daughter.
The government has raised import taxes on gold three times in the last year, to curb gold purchases in a country where the yellow metal has long been a customary gift at weddings and festivals.
The latest increase in taxes from 4 to 6 percent came earlier this week and was accompanied with an appeal by the country’s finance minister, P. Chidambaram, to people to moderate their demand for gold. He said the country cannot afford the hefty imports.
India produces virtually no gold and imports about 700 tons every year to feed massive domestic demand. The bill: $56 billion in the last fiscal year, or 11 percent of the country’s total imports. A professor at the National Institute of Public Finance and Policy, N. Bhanumurthy, says this massive import bill is contributing to a trade deficit. He says gold also is seen as an unproductive investment. “More than half of the current account deficit has been contributed by the imports of gold in the recent period. The savings should be channelized for some investment activity. Gold is neither investment nor financial savings,” he explained.
The record high prices - about $540 per 10 grams -- have prompted people to buy less gold jewelry, says Bubbly Sethi, who runs a jewelry business in New Delhi. “Everything is reduced. If they were giving six bangles, they are giving one bangle. If they were giving big sets [gold neck and ear pieces], they are giving less, that is the difference which is coming,” Sethi explained.
But jewelers point out that reduced demand from individuals has little impact on overall business. That is because the number of marriages is on the rise in a country where two-thirds of the billion-plus population are under 30.
It is not just urban areas that are driving demand. Rising prosperity in rural areas is resulting in more purchases in villages where banking facilities are often limited and where gold is considered a safe asset. That is a huge market in a country where two-thirds of the population live in rural areas.
Indians are estimated to have about 20,000 tons of gold locked away in jewelry, bars and coins.