India hikes import tax on gold just as wedding season demand picks up

06/05/2013 2:59 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Not that gold needs more bad news…

Today, India, the world’s largest gold buyer, announced that it was increasing its tax on gold imports to 8% from 6%. The tax comes just as demand looks to surge ahead of the busy gold-buying season for festivals and weddings. (As measured by the SPDR Gold Shares ETF (GLD), gold is down almost 22% from its October 2012 high.)

The latest tax increase, effectively immediately, comes on top of increases in 2012 that had already tripled the tax on gold imports. Gold imports may drop by as much as 20% this year, according to the All India Gems & Jewellery Trade Federation.

The tax is the Indian government’s latest attempt to close a yawning gap in its international accounts. The country showed a $32.6 billion current-account deficit in the last quarter of 2012. That’s equal to 6.7% of India’s GDP, a record.

That deficit has driven the Indian rupee lower—down 4.8% against the U.S. dollar in the last month—and has stoked inflation in the country. Wholesale prices climbed at an annual rate of 4.9% in April, but inflation in consumer prices rose 9.4%.

An increase in inflation driven by a falling rupee and a rising current account deficit could threaten the Reserve Bank of India’s efforts to boost economic growth by cutting interest rates. For the fiscal year that ended in March 2013, India’s economy grew by just 5%. That was down from 6.2% growth in fiscal 2012 and regular 9% annual growth before the global financial crisis.

In an effort to give Indian investors a domestically produced inflation hedge to buy instead of gold, last week the government sold inflation-indexed bonds for the first time in 15 years. Wonder how those would look at a wedding feast?

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