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India Gold Imports Nearly Triple in August Despite Tax Increase and Government Regulations

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Despite rising prices, a tax increase, and government attempts to tighten regulation of the jewelry industry, gold continues to flow into India.

Gold imports into the country nearly tripled year-on-year in August. An estimated 60 tons of the yellow metal flowed into the Asian nation last month, up from 22.3 tons in August 2017. This continues a trend for the year. Over the first 8 months of 2017, India’s gold imports climbed to 617.5 tons, a 158% increase over 2016.

As a Reuters report notes, the Indian gold market has an impact on the broader world market.

Higher purchases by India, the world’s second biggest consumer, could support global prices, trading near their highest level in a year.”

The continued flow of gold into India demonstrates the resilience of the market in that country. On July 1, the Indian government replaced a labyrinth of taxes with a nationwide 3% Goods & Services Tax (GST).  The World Gold Council called it the “biggest fiscal reform since India’s liberalization in the early 1990s.” The WGC said the new tax structure would ultimately increase demand for gold in India, but analysts braced for a short-term dip in imports as the tax went into effect and the market adjusted to the new system.

As Reuters pointed out, traders almost immediately found a loophole in the tax scheme that helped boot imports.

India imposes a 10% import duty on gold, but this does not apply to countries with which it has Free Trade Agreements (FTAs), like South Korea. To avoid duty-free imports from those countries, India had previously imposed a 12.5% excise duty. This was scrapped along with other local taxes when a goods and services tax (GST) was introduced on July 1, allowing buyers to import gold from South Korea without paying import tax.”

Trade houses imported nearly 20 tons of duty-free gold from South Korea in August. On Aug. 25, the government realized the loophole and restricted imports of gold from South Korea.

Gold demand in India has rebounded this year after a tough 2016. A number of factors pushed demand down last year, including a jeweler strike. But by June of this year, the country’s gold imports had already topped 2016 numbers. Some analysts say pressures on demand may eventually temper imports again, but the end of September begins an important festival season, and many analysts expect continued strong demand.

Indians have a nearly insatiable appetite for gold, and the yellow metal plays a key role in the Indian economy. It’s not just a luxury. Even the poor buy gold in India. Indians traditionally buy and hold gold, primarily in the form of jewelry. The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system. As we reported last spring, many Indians thwarted a government policy to bring the underground economy out of the shadows by converting their “black money” into gold.

To give you a sense of just how much Indians  love gold, festival-goers bought more than 23 tons of the metal in a single day during the Akshay Tritiya festival last April.

The Indian government will likely continue to try to tamp down on gold imports. The inflow of gold tends to widen the country’s trade deficit. But Indians have proven time and again, no matter what the government does, people manage to get their hands on gold.

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