India raises duty on gold imports as demand surges

India is the world's biggest consumer of gold and demand for the metal has been rising further

India has increased the duty on gold imports for the second time in six months, in an attempt to rein in surging demand for the precious metal.

The finance ministry said it had raised the duty to 8% from 6%.

Gold is a preferred investment option among Indian consumers and the recent drop in its price has boosted demand.

But gold imports are also one of the biggest contributors to India's current account deficit, which has been rising, prompting concerns among policymakers.

A current account deficit, which is the difference between inflow and outflow of foreign currency, occurs when a country's total imports are greater than its exports.

A rising deficit impacts the country's foreign exchange reserves as well as the value of its currency. India's current account deficit hit a record high of 6.7% of its gross domestic product (GDP) in the October to December quarter.

The government has been trying to bring down the deficit and improve the country's finances amid threats of a downgrade in its ratings.

Right move?

India's gold imports touched 162 tonnes in May, nearly twice the average level.

Some industry players said the latest move was likely to result in a sharp decline in shipments over the next couple of months.

"In April and May we imported around 300 tonnes. In June and July imports would be around 90 tonnes," said Prithviraj Kothari, director with RiddiSiddhi Bullions Ltd, a Mumbai-based gold wholesaler.

However, some argued that the increase in the import duty was unlikely to impact imports as consumer demand remained high. They warned that it might encourage smuggling.

"From the last few months all the wrong decisions are being taken by the government to tackle gold imports," said Mohit Kamboj, president of the Bombay Bullion Association.

"This is not going to help reduce imports but smuggling will increase."