India Targets Gold Tax Once Again to Help Current Account, Currency and Inflation

Commodities & Metals

Published: September 17, 2013 10:20 am

Last Updated: September 17, 2013 10:25 am

In an effort to curb its current account deficit, and ultimately to prevent even more inflation, the nation of India reportedly has increased its tax on gold imports again. Gold jewelry imported into the country now will face a 15% government tax, rather than the previous 10%. This matters because India was listed by us as one of the eleven nations suffering under severe inflation.

The prior raise in the gold tax was just made in the past 60 days and included gold bars and coins. That tax was hiked to 10% from 8% at the time. While this may seem a bit egregious to Westerners, India also is looking to help its local jewelry makers in this duty.

What outsiders have to know and understand is that India is suffering under severe inflation, and its weakness in the Indian rupee currency was only making matters worse. India already has to rely almost exclusively on foreign oil imports, and it has to pay the same market prices as everyone else.

Gold is only a one of the real problems in the total Indian economy, but it is symbolic because Indian people tend to prize gold jewelry much more than other gifts for weddings and other special occasions during the start of the nation’s festival season. It does not help that almost all that gold must be imported.

When a nation has to import all of its oil and gold, it keeps a constant state of pressure on that nation’s currency. India’s current account deficit is now targeted at 3.8%, versus some 4.8% last year.

We are seeing moves in two key ETFs around this matter. First off, the SPDR Gold Shares (NYSEMKT: GLD) is up 0.4% at $126.85, as gold is up about 0.3% at $1,316 per ounce. The WisdomTree India Earnings (NYSEMKT: EPI) ETF is down, but this may simply be a breather. Its 0.25% drop to $15.65 compares to a 52-week range of $12.99 to $20.50, but that $12.99 intraday low was only back on August 28. That is a 20% rally in just over two weeks.

It may seem challenging to consider that raising a tax on an import would fight inflation when it simply raises the price on the consumer. India seems to be trying to choke off that demand, and hopefully those billions that would have spent on gold may get spent locally on non-imported goods instead of on gold.

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