December 28, 2013 in Business

Gold tax weighs on bridal budgets in India, where bling’s the thing

Kay Johnson Associated Press
 
Associated Press photo

Customers look at gold jewelry at a shop in Mumbai, India, on Dec. 6.
(Full-size photo)

MUMBAI, India – With India’s wedding season in full swing, the glass sales counters in Mumbai’s famed Zhaveri gold bazaars are crowded with customers eyeing elaborate headpieces, nose rings and necklaces. No one does jewelry quite like an Indian bride, who by tradition wears all the gold she can stand up in and her family can afford.

These days, though, even the most ambitious bridal budgets don’t bring the bling they used to, thanks to hikes in import duties and a rise in local gold prices.

Gold prices in India, which imports nearly all its gold, have risen 50 percent over the past three years to about 87,000 rupees, or about $1,400, an ounce.

Thanks to the new tax and weaker rupee, that’s about a 20 percent premium over the world market price, hovering just under $1,200 an ounce.

More gold-buying, though, is exactly what the Indian government is trying to stop by raising import duties three times this year to 10 percent on gold bullion – up from 2 percent in January – and 15 percent on gold jewelry.

Gold is India’s second-biggest import behind oil, and purchases have soared in recent years as rising incomes from a decade of economic growth sent Indian consumers on a buying streak.

The problem is that the greater buying of the precious metal has dealt a blow to India’s economy by increasing the flow of money out of the country compared to inflows. As a result, the current account deficit rose to a historic high of 4.8 percent of India’s gross domestic product in the fiscal year that ended in March.

That in turn has helped weaken the rupee by about 10 percent this year, making many products more expensive by raising the cost of oil and other raw materials.

But in trying to discourage gold buying, India is taking on a passion that dates back thousands of years and is deeply entwined in Indian culture.

Still, the tax measures appear to have worked, with gold imports down 32 percent in the July-September quarter and India on track to lose its status as the world’s No. 1 consumer of gold to China this year. The drop has eased pressure on the current account deficit, now on track to reach a more comfortable annual average of 3 percent of GDP.

The official numbers tell only part of the story, though, since the higher import duties have also given birth to increasingly creative smuggling schemes.

“Going by the number of seizures that have been made at airports and elsewhere, there is enough evidence to say that smuggling probably has doubled this year,” said Somasundaram, the India director for the World Gold Council.

Despite the steps to limit imports, India’s demand for gold remains robust. It’s plainly evident during wedding season, which runs from November through January. The custom of adorning brides with gold is both spiritual – gold is a powerful symbol of purity – and practical. The wife’s wedding adornments belong to her as insurance against a bad marriage, even though many men confiscate it.

“Everyone likes gold. Marriage happens just once in your life,” Abhirami Damodaran said as she shopped for her wedding jewelry.

The daughter of a real estate businessman in Kerala, she plans to flaunt nearly 7 pounds of gold worth $150,000 on her big day.

“When we wear gold, it’s not only the bride who is happy, but her parents as well,” she said. “They are giving gold as part of a future investment.”

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