India’s Misguided Effort To Curb Gold Demand

[A look at what's going on in India regarding the government effort to discourage people from buying gold.]

Two news items from India this week – a surge in Indian gold imports this month and the Reserve Bank of India cutting interest rates – have prompted this closer look at what’s going on in the subcontinent as policy makers grapple with economic troubles and the domestic gold market.

Sadly, as it relates to the government once again hiking import duties to deter gold demand last week, an effort aimed at lowering their trade deficit and bolstering the currency, it seems clear that this initial assessment in an article from the other day got it about right:

This is a fascinating development – a government taking steps to curb demand for what has served as a store of wealth and an important part of the culture for centuries in order to help bolster the government’s paper money amid persistently high inflation.

So, what’s going on?

Last week, the Indian government raised the import duty on gold from four percent to six percent, this after twice doubling the duty last year from just one percent. The move was aimed at discouraging gold buying that accounts for just over 10 percent of the nation’s troublesome trade deficit, though oil imports are a much bigger share at about 30 percent.

The first tip-off that there’s something seriously wrong here is that the government subsidizes energy prices to the public – they’re making consumers pay more for what contributes 10 percent to the trade deficit while artificially lowering the price for what contributes 30 percent.

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