How a tax change in India could “rattle the global gold market”

india tax global demand gold

With Indian prime minister Narendra Modi expected to lower the tax on all gold imports in his budget proposal on February 28, eventually sending the tax to go from the current ten percent all the way down to two percent, Bloomberg correspondent Alix Steel recently explained in an interview how the move will likely impact the global market for gold.

According to Steel, the ramifications that this will have on the gold market will be “significant” as India is one of the world’s top gold consumers. “If the tax was lowered from ten percent to two percent, it could actually imply twenty-three million ounces added to India’s gold imports just this year,” Steel says.

The interview points out that twenty-six percent of worldwide demand for gold comes from India as each Indian family allocates eight percent of their budget to gold purchases. While these purchases are generally made for jewelry, with the primary purpose of using in weddings and similar ceremonies that are very common in the country, they are also viewed as a way for families to store wealth.

An increase in Indian demand for imported gold would no doubt have a large impact on the global gold demand. “India bought so much that the account deficit widened so much they ordered about twenty percent of everything that’s imported will be re-exported. Plus there’s tax on imports, so demand hit a cliff in 2013 falling thirty-five percent as premiums were three-hundred dollars,” Steel reminds us, noting that this could be changing with the introduction of a reduced import tax.

Steel also mentions that the tax cut might be gradual, possibly cutting the tax to eight percent first in order

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for the government to see how it will affect demand as well as the country’s account deficit. She notes that there there has been a lot of gold stockpiling in 2014 with record jewelry demand, meaning that there could be a slight delay before India goes into the open market and starts making purchases. “April is when we could see a big uptake there,” Steel added.

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