Investors that expected the end of gold tariffs in India pushed up prices last week when the newly elected government retained them. Gold is a key store of wealth in the country.

India’s newly elected government, which has been generally given a warm welcome by investors looking for decisive reforms to the BRIC nation, has surprised precious metal markets by retaining an import duty on gold and silver. An industry figure said the market impact of the decision is likely to be limited, however.

The duty remains at 10 per cent. Like other populations in the Asian region, Indians are traditional heavy users of gold for jewellery and a store of value, with a corresponding (often arguably justified) distrust of state fiat money.

On Thursday last week, when the announcement emerged, Indian gold futures jumped 2 per cent. On Friday, gold futures on the US Comex exchange were down slightly (Bloomberg); India spot gold prices, in rupees, were slightly higher.

The measure of retaining the duty comes as India looks to narrow a large current account deficit. The new government, led by Narenda Modi, has the most emphatic mandate since the 1980s. There are high expectations reforms will boost India's long-term growth prospects and also curb a serious problem of public sector corruption. The administration has pledged to keep the 2014/15 budget deficit at just over 4 per cent of gross domestic product. Some - not all - curbs on foreign ownership of Indian firms have been loosened.

Smuggling

Reuters quoted the The World Gold Council as stating that 200-250 tonnes of gold have been smuggled into India since the imposition of import controls, suggesting limited effectiveness of tariffs.
Adrian Ash, head of research at BullionVault, a precious metals trading platform firm, said of the tariff retention: “India is the number one gold-buying nation, therefore any easing in its anti-import rules might be expected to boost world prices. However, while India is crucial to the gold market, its impact on prices is complex. India’s gold demand reacts to price moves. It doesn't drive them.”

“India’s private gold buying is led by gift-giving and religious festivals. So like any consumer market, Indian households tend to buy gold more when prices fall, as Spring 2013 clearly showed. Imports jumped to record levels as world prices fell, worsening India's trade deficit and leading New Delhi effectively to ban legal inflows mid-year. By then however, world gold prices had already found their 2013 floor. Gold smuggling into India has clearly risen since. But the black market has filled perhaps only half the collapse in legal imports. With Indian demand suppressed, Dollar gold prices have meantime risen over 10 per cent regardless,” he continued.

“Higher prices don't necessarily dent demand. Gold prices more than tripled in dollar terms between 2004 and 2014, rising 16 per cent per year. India's annual demand rose 8 per cent on average as household incomes also grew. That's put a rising floor under the gold price, which continues to be led by Western investment flows and sentiment,” Ash added.