LAUNCESTON, Australia, July 9 (Reuters) – Gold’s recent rally to a six-year high is suddenly looking a little more fragile after India, the world’s number two buyer, unexpectedly hiked import duties.
The increase in the duty to 12.5% from 10% on July 5 caught gold traders and jewellery manufacturers off guard as some had been expecting the government to lower the tax instead.
The Indian government wants to reduce its fiscal deficit as well as the trade deficit, and since gold is the second biggest import by value behind crude oil and fuels, it is an obvious target for increased taxation.
While boosting the cost of gold to domestic consumers will lead to an increase in smuggling of the precious metal, it’s also likely that demand growth will take a hit.
The last time an Indian government raised import taxes, in August 2013, demand for gold jewellery fell sharply and took about a year to recover to previous levels. India’s gold jewellery demand fell 17% in the fourth quarter of 2013 to 138.1 tonnes, down from 166.6 tonnes in the same quarter a year earlier.