Indian restrictions on gold imports unlikely to decrease gold demand

Even as the Indian government tries to curb demand for foreign gold imports with raised import taxes, India’s citizens still demand the yellow precious metal.

“Gold is far more than just a nice thing to wear at Indian weddings. It's a key element of the religion and culture in a country that consumes 20 percent of global production of the metal,” wrote Mark Magnier in the Los Angeles Times. “In India, it is a status symbol, a sign of respect, inflation hedge, a repository of emergency savings and, of course, something to make the bride shine."

That has made the increasing cost of gold a dramatically larger burden for Indian families, who consider it a staple in weddings, the Diwali celebration of lights, and other significant events that happen from September through the end of the year.

India’s currency has dropped sharply in recent weeks, making gold prices relatively higher for Indian residents. This follows the government’s increase of import taxes on precious metals to 10 percent from four percent. The increase was put into effect earlier this year.

However, it is far from clear whether the government’s actions have actually curbed gold demand.

“Previous attempts to severely restrict or license its import have failed,” wrote Magnier.

Instead, it is expected that the duties have dramatically driven up the gold smuggling trade.

Rajiv Biswas, an Asia-Pacific chief economist with market research firm HIS, told the Los Angeles Times that the tax on gold only encourages smuggling and creates new opportunities for organized crime.

"It’s not easy to change a culture that marks every phase of life, from birth to wedding to parenthood to death, with gold," said Partha Nath Mukherji, professor emeritus of sociology at New Delhi's Institute of Social Sciences.

“It's evidenced in a love of glitter, be it solid-gold furniture, cricket bats, idols, temple doors or chain-mail shirts worth millions of dollars. Gold is enshrined in ancient Hindu legends as well as the latest marketing campaigns, such as those for 24K-gold-plated iPhones. When Tata Motors wanted to draw attention to its Nano car model in 2011, it coated one of the vehicles with 176 pounds of gold and gems, gaining far more in publicity than the $3-million value of the shiny stunt,” wrote Magnier.

India currently and historically has been the largest gold consumer in the world, although China is expected to overtake India before 2013 is over, according to the World Gold Council reported the LA Times.