* Tax rise would not dampen appetite for gold in long term
* High inflation, tradition ensure gold will keep its lustre
* Gold imports second only to oil, fuelling record current
By Rajesh Kumar Singh and Siddesh Mayenkar
NEW DELHI/MUMBAI, Jan 16 India's passion for
gold is putting such a strain on state finances that the
government may slap higher import taxes on the precious metal,
but demand buoyed by heady inflation and meagre savings will
blunt the impact of any rise in duties.
Initial success from a tax hike in March last year was
stifled by the arrival of major festivals such as Diwali, when
gold is a must-give present, and the winter wedding season.
That has scuppered New Delhi's goal of reining in spending
on gold by around a third to $38 billion in the fiscal year that
ends in March, prompting Finance Minister P. Chidambaram to say
another tax increase could be on the cards.
But market participants say that would do little to dull
gold's lustre for most Indians, especially with bullion prices
And the finance ministry would ideally like imports to be
around $30 billion, an economic adviser there has told Reuters,
with industry experts dismissing this as little more than
India is challenged only by China in its appetite for gold,
and with nearly all demand covered by imports, the country's
purchases are a major factor in global prices.
The latest figures show the volume of imports jumped 48
percent in July-September from the quarter before and were only
8 percent down on 2011.
"It is the disease that needs to be cured rather than the
symptom," said Munish Dayal, a partner at Baring Private Equity
Partners India Limited.
With inflation above 7 percent and India's central bank
keeping key rates at 8 percent, it's no wonder that a 13 percent
rise in domestic gold prices in 2012 looked attractive to so
Add to that a near total lack of banking facilities in rural
areas, where about 69 percent of the 1.2 billion population
lives, and it's easy to see why Indians would rather invest in
bangles than bonds.
India wants to reduce gold's share of its import bill from
11.5 percent -- the second-highest outlay after oil.
The petroleum bill, while inflated by subsidies, is largely
unavoidable for such a huge economy that imports 80 percent of
its oil needs and is growing around 5.5 percent a year, but the
government sees money tied up in gold as dead investment.
Jewellers Gitanjali Group, which bills itself as a $2.5
billion multinational and features Bollywood movie stars Shah
Rukh Khan and Kareena Kapoor in its adverts, writes off the duty
hike, which a senior finance ministry official said could be to
5 or 6 percent on standard gold bars from 4 percent now.
"A duty hike of 1 to 2 percent won't make any difference ...
It won't impact our sales at all," said the firm's head, Mehul
And entrenched traditions will ensure gold's appeal remains
The winter wedding season is in full swing and parents will
snap up gold to shower their daughters, to show off their wealth
and give her the traditional portable dowry as she moves into
her husband's house.
"We will have to buy gold for weddings despite duty hikes as
we have to stick to the customs followed by our
great-grandfathers," said 52-year old Ramesh Madhani, eyeing
jewellery in Mumbai's chaotic Zaveri Bazaar, India's biggest
The threat of more expensive imports has sent buyers into a
frenzy, with traders estimating 40-50 tonnes of gold could have
been imported in the first week or so of January -- nearly a
month's worth in just a few days. That is despite near
record-high domestic prices above 30,000 rupees ($540) per 10
The spurt could be nipped by a duty hike, but demand should
bounce back, particularly with spot gold currently around
$1,670 an ounce after gaining 6 percent in 2012, its 12th
straight year of gains and one of the longest bull runs ever in
Akshaya Tritiya, one of the biggest festivals for giving
gold, will spice up buying further in early May.
The fundamentals supporting demand have helped spur Indians
to squirrel away 20,000 tonnes -- about three times the holdings
of the U.S. Federal Reserve -- in jewellery, bars and coins.
Only a tiny fraction of this has been tempted out by high
prices and hiked import duties to be recycled, which can mean
anything from turning grandma's lobe-lengthening earrings into
fashionable nose rings or trading in "imitation" coins often
used as a kind of gold gift voucher.
Attempts by the government and the Reserve Bank of India to
encourage use of alternative investments such as gold bonds,
deposit schemes and gold-based funds have gained little
Hoisting the import duty on gold also has the side-effect of
increasing smuggling, which government officials say has grown
three-fold since the tax was last raised.
But Chidambaram may have few other politically palatable
options to handle the record current account deficit -- which
hit 5.4 percent of gross domestic product in the September
quarter -- ahead of an election likely in 2014.
($1 = 55.0700 Indian rupees)
(Writing by Jo Winterbottom; Editing by Joseph Radford)