MUMBAI, India – Indias steep new tax on gold imports doesnt deter Mousumi Rao as she holds up a glittering $5,000 filigree necklace that could adorn her daughter on her wedding day. Raos daughter isnt getting married next month or even next year. The 12-year-old is at least several years away from her wedding.
Since tradition demands that a bride practically drip with gold jewelry, its never too early for an Indian family to start preparing, particularly with the high cost of gold these days.
Im collecting things for her now so when she grows older and marries, I should have enough gold for her, Rao said. It is very auspicious for us, one of the most auspicious things, to give gold to your daughter.
Gold has been deeply entwined in Indian culture for thousands of years. Nowadays, India is by far the worlds biggest buyer of gold, and those imports are an increasing drain on an economy that is growing too slowly to reduce widespread poverty.
Last year, Indians imported 864 tons of gold, about one fifth of world sales. The cost of $45 billion was second only to Indias bill for imported oil.
The unquenchable appetite for gold coins, bars and jewelry has swelled Indias trade deficit and weakened its currency, making crucial imports such as fuel more expensive.
The government cant do much about oil imports – without fuel, the economy would grind to a halt – so in the past year it has tried to rein in gold demand, raising the import duty three times in a year to its current level of 6 percent. The higher tariff is proving little match for age-old tradition.
Every Indian wants gold. Now is the wedding season, and Im seeing an increase in demand no matter about the tax, said jeweler Arun Kaigaonkar. Prices have been rising for years, and still people buy.
He said that not only jewelry, but also gold bars and coins, remain in high demand because in many rural areas, banking is less available.
In the countryside, people save their money only in gold, he said.
Last year, Indian gold-buying briefly dropped for six months, but then it roared back in the second half of the year. And in January, sales spiked sharply as jewelers and investors rushed to buy ahead of the import tax hike to 6 percent, which took effect on at the end of the month.
The culture of gold is so strong in India. Its difficult to contain this demand by just tweaking import duties, said Samiran Chakraborty, an economist with Standard Chartered Bank in Mumbai.
Through centuries of warfare and the shifting borders of regional kingdoms, gold was the safest currency. It is also a symbol: In some Hindu legends, the god Brahma was born from a gold egg. Parents of the bride give gold to reflect their prosperity.
Such a gift can also make gold an insurance against a bad marriage, since the jewelry is the wifes, though many men take it anyway.
In early 2011, an ounce of gold cost about $1,375 on the world market, or nearly 62,000 rupees inside India at the exchange rate at the time.
It now costs more than $1,600 an ounce, but the drop in the rupee against the dollar means the cost in India has risen by an even greater extent, to about 90,000 rupees.
The rising price does reduce demand, but each festival and wedding season brings sales back up again.
Industry experts say there are signs that higher import taxes have encouraged smuggling, which hasnt been a problem since India lifted strict gold controls more than 20 years ago.
Few expect a return to those Draconian measures. Potentially more effective is a new scheme to get the vast amounts of gold already in India back into circulation.
India is not only the worlds biggest importer of gold, its the biggest hoarder of gold, said Albert Cheng, a managing director of the World Gold Council, which estimates that some 18,000 tons of gold is locked up in bank vaults and family homes around the country.