India is Helpless in Reducing the Demand on Gold

Gold in India

The Indian government is very unhappy with the strong demand on gold, which threatens to widen the Indian deficit.

The previous economic reformation in India boosted the country’s economy to the world’s top 10 strongest economies in the world. But the Oil and gold imports are increasing the Indian deficit to a record high.

Palaniappan Chidambaram, the Indian Finance Minister, stated that India imported around 162 metric tons of gold the past month. He added that India can’t afford to continue this high level of purchases, and the critical point is at 262 metric tons of gold per month. The minster hinted that policies will be implanted and re-assessed if necessary.

Despite the higher taxes on gold in India this year, the buying and imports continued. In January, India tripled the tax on gold imports to reach 6%. In Late April and early May, the RBI put further constrains on importing gold. The next step might be total banning of gold imports. But this step proved unsuccessful as smuggled gold ate the Indian economy before the economic reformation in the 90s.

Indian gold imports were estimated from April to June by 300-400 tons, according to the WGC report in May 29. The gold price dip in April 15 initiated a gold rush in the world and India had the largest share. The demand on gold is expected to increase further especially in rural areas of India in May because of the wedding season and festivals.

Madan Sabnavis, chief economist at Credit Analysis and Research in India, said that higher tariff and premiums to make gold more expensive might do the trick to ease the demand. Though, unless the prices go higher, the pressure on the deficit will remain and there is a “very little room” for the government to act.

The RBI reported the account deficit reached $32.6 billion in the fourth quarter in 2012. Gold and oil imports were the main reason for this debit. The Indian government hands are tied in decreasing its oil imports, which leaves only gold imports as their only option to reduce the current deficit.