India raised the import duties on gold and other precious metals on Friday in a surprise move that industry officials say could dampen retail demand and boost smuggling in the world’s second-biggest bullion consumer.
Lower demand from India could weigh on global prices that are trading near their highest level in six years.
Jewellery trade associations have asked India’s government to reduce gold import duties, which have caused a surge in smuggling.
The government instead hiked the duty to 12.5% from 10% as policymakers try to bring down the fiscal deficit and recapitalize banks.
“This is a shocking move. We were expecting reduction in the custom duty,” Anantha Padmanabhan, chairman of All India Gem and Jewellery Domestic Council (GJC) told Reuters, adding the hike has effectively raised smugglers’ margins.
Gold smuggling surged in India after the government raised the import duty to 10% in August 2013. Grey market operators - businesses that smuggle gold from overseas and sell it in cash to avoid the duties - got a further boost in 2017 when India imposed a 3% sales tax on bullion.
The south Asian country also raised import duty on gold dore or non-refined mined gold, to 11.85% from 9.35% and to 11% from 8.5% on silver dore, Finance Minister Nirmala Sitharaman said in her first federal budget speech on Friday.
India has been trying to bring transparency in bullion trading by curbing cash transactions but the hike “will dilute efforts to reduce cash transactions,” said Somasundaram PR, the managing director of the World Gold Council’s Indian operations.
Gold futures jumped over 2% after the announcement to a record high of 35,100 rupees ($512.82) per 10 grams.
The high local prices may also further weaken demand, said Snehal Choksey, director at Shobha Shringar Jewellers.
Shares of jewellery makers such as Titan, P C Jeweller, Tribhovandas Bhimji Zaveri Ltd and Thanga Mayil Jewellery Ltd fell as much as 7.8%.
Up to 95 tons of gold was smuggled into India in 2018, according to the WGC.
“Legal imports would fall and smuggling could rise above 200 tons this year,” said a Mumbai-based dealer with a gold importing private bank.
Industry officials fear the higher duties could prompt customers to buy jewellery from some informal jewellers who use smuggled gold to make ornaments.
“The increase in custom duty makes gold sold by organizsed retailers more expensive and encourages customers to buy from unorganized jewellers,” said Vaibhav Saraf director of Aisshpra Gems & Jewels.
India hikes gold import duty, industry fears smuggling surge