After the Indian government hinted another attempt to reduce the Indian gold imports, they actually increased duty on gold for the second time in 6-months.
Palaniappan Chidambaram, the Indian Finance Minister, hinted earlier this month about another move from the Indian government to decrease gold imports in an attempt to reduce the deficit gap. After 3 days from his statement, the Indian government raised the duty on gold imports to 8%. By January this year, the India tripled tax and duties on gold imports to reach 6%, and then rose again to be at 8%.
Gold contributes in widening the Indian deficit. India is the world’s number one gold consumer, and it doesn’t produce enough to meet the high demand. Hence, they rely heavily on gold imports to meet the renowned Indian jewelers demand.
The Indian deficit isn’t widening just from gold. India imports oil and gas, vegetable and animal oils, mineral products other than jewelry materials and machineries. If the Indian government can reduce these numbers and encourage jewelry exports, they shouldn’t face a critical problem with the deficit.
Gold is a major investment vessel in India. People there doesn’t consider gold as a mere commodity, they see it as money much like other fiat currencies.
Investors and economists from all over the world warned from the return of smuggling gold and gold black market. The economic reformation of India in 1991 was initiated by cancelling the Indian gold Act, which banned Indians from holding any physical gold. The populace response was to smuggle gold. Another effect of the Gold Act was the outflow of skilled Indian jewelers to the Middle East and other countries.