Gold imports to India, the world's top importer, are likely to fall significantly in 2012 as the government's decision to double import duty to 4% is seen squeezing local demand, especially for jewellery, industry officials said.
Finance Minister Pranab Mukherjee proposed raising customs duty on gold from the current 2% of value in announcing his Budget for FY13 beginning in April.
"One of the primary drivers of the current account deficit has been the growth of almost 50% in imports of gold and other precious metals in the first three quarters of this year," Mukherjee said, in a budget aimed at trimming the deficit.
The country imported a record 969 tonne of gold in 2011.
"This is not good. It will reduce demand for gold significantly," Bombay Bullion Association President Prithviraj Kothari said.
"It will have more effect on jewellery demand," he added and said that imports of gold through illegal channels will rise.
The country's jewellery demand last year stood at 567.4 tonne against investment demand of 366 tonne, World Gold Council data showed.
Physical dealers said Indians were buying gold although volumes were small.
Demand in India had already started to falter this year because of the rally in global prices. Gold spot prices touched their highest level for this year at the end of February around $1,790 per ounce.
Kothari said the higher duty would hurt jewellery exports of Indian firms like Rajesh Exports, Titan Industries and Gitanjali Gems as their products would have to reflect their higher input costs. Shares of these companies were down 1.5% to 3% in a weak Mumbai market.
But some industry players said the import duty hike was unlikely to impact demand in India, where gold is both an investment and an adornment.
"Over the long term scenario, we don't see it altering the reason why people buy gold in this country," said Chirag Mehta, fund manager at Quantum Gold Fund.
The most-active gold future for April delivery on the Multi Commodity Exchange (MCX) was up 0.38% at Rs 27,810 per 10 grams by 01:35 pm.
Market participants were not expecting a steep rise in duty in the budget after India hiked the gold import duty by 90% in January.
One analyst said there were concerns India could move to raise duty again.
"The risk is if imports go up again, they may think of further hiking the duty," said Gnanasekar Thiagarajan, director with Commtrendz Research.
