Gold is set to cost more from April 1, 2012 with Finance Minister Pranab Mukherjee Friday proposing to raise import duty on standard gold bars and coins which have more than 99.5 percent purity from two to four percent and on non-standard gold from five to 10 percent.
"I propose to increase basic customs duty on standard gold bars, gold coins of purity exceeding 99.5 per cent and platinum from two percent to four percent and on non-standard gold from five percent to ten percent," Mukherjee said, presenting the union budget for the next fiscal.
"In sync with these, basic duty on gold ore, concentrate and ore bars for refining is being enhanced from one percent to two percent. On the excise side, duty on refined gold is being increased in the same proportion from 1.5 percent to three percent."
Mukherjee explained the hike saying gold imports was one of the primary reason for the current account deficit and that there had been a growth of almost 50 percent in imports of gold and other precious metals in the first three quarters of the current fiscal.
"I have been advised to strengthen the steps already taken to check this trend for better results."
According to Ajay Mitra, managing director for World Gold Council's (WGC) India and Middle East chapter, the increase in custom duty will have a very short-term impact on demand as gold remains an attractive investment option.
"There may be a very short-term impact to demand for gold as a result of this measure. We believe that in the longer term, this increase will not substantially affect demand," Mitra said.
“The fundamental reasons for buying gold jewellery are unchanged. They are rooted in Indian culture and weddings. Investment demand is driven by the need to protect against inflation, ease of liquidity and the increasing use of gold as a monetised asset to secure loans.”
WGC's recent data showed that India saw a dip in demand in 2011 that fell by seven percent to 933.4 tonnes, down from 1,006.3 tonnes due to volatility in rupee value and the tightening of monetary policy to control inflation.
Jewellery consumption in the period under review had fallen 14 percent to 567.4 tonnes in the period under review from 657.4 tonnes in 2010. However, gold bar and coin segment grew by five percent in the year to 366 tonnes from 348.9 tonnes in the corresponding previous year.