India May Cut Its Gold Tax, Supporting Global Prices

Analysts are expecting Indian Prime Minister Narendra Modi to cut the huge 10% gold import tax in his budget proposal at the end of February. Late last year, India scrapped its import rule that required 20% of all gold imports to be reexported. Premiums, and consequently smuggling, have both dropped since then. If Modi were to significantly cut the tax as well, India could see an additional 23 million ounces of gold demand in 2015. This would add significant support to global gold prices.

Indian demand accounts for more than a quarter of all global gold demand, but this was severely weakened by the government’s 20/10 import and tax regulations over the past two years. Demand dropped so much that China surpassed India to become the world’s largest gold consumer in 2014.

Bloomberg conducted the analysis of how a cut in India’s gold import tax would affect the global gold market. Alix Steel explains that it would have significant repercussions:

If the tax was lowered from 10% to 2%, it could actually imply 23 million ounces added to India’s gold imports just this year. That provides a key support to prices and would help to offset any weakness that we might see in China.

“Here’s what happened. India loves gold. We all know that. A ton of the family’s budget is spent on the metal. It has huge implications for world demand. It’s a store of wealth, but also a lot of tradition. They use it for a lot of weddings, and there are 5 million weddings each year.

“India bought so much that the account deficit widened [dramatically]. So [the Indian government] ordered that 20% of [imported gold] will be reexported, plus this tax on imports. Bam, demand just hit a cliff in 2013. It fell 35%. Premiums were at 300%.”

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