Government targets raw gold in second duty hike this week

Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012.

MUMBAI (Reuters) - India more than doubled duties on gold alloy on Tuesday, hard on the heels of a tariff rise for refined gold, as New Delhi tries to curb demand in the world's biggest bullion importer and rein in a record current account deficit.

India's gold imports are set to break through a target ceiling of $38 billion in the year to March 31, 2013, tying up funds in what New Delhi sees as non-productive investment.

Industry experts say the moves are unlikely to have much of a long-term impact on demand, which is driven by tradition and inflation, but for now the government is expected to hold off further measures as it waits to see their effect on buying.

"I don't see any further restriction in the immediate future as the government will be waiting to see the impact on the CAD (current account deficit)," said Daman Prakash Rathod, a director with Chennai-based wholesaler MNC Bullion.

In the latest move, India hiked the import duty on gold dore bars to 5 percent from 2 percent. Dore, an alloy of gold and silver used by refineries, accounts for about 100 tonnes or about 12 percent of India's annual imports.

The move came one day after the government raised the import tax on refined gold to 6 percent from 4 percent and instituted incentives for gold savings schemes and to bring more gold into circulation.

"The measures should help cut gold imports significantly," said a senior finance ministry official who declined to be named, but he stopped short of quantifying the size of decline.

For graphic on India gold import volumes, click link.reuters.com/syd25t

For graphic on inflation, gold imports, click link.reuters.com/waf25t

For graphic on trade balance, gold imports, click link.reuters.com/qyd25t

REFINERS, WEDDINGS, SMUGGLING

Tuesday's move helps close an arbitrage between dore and refined gold, which opened up last year when the government hiked the gold import duty to 4 percent.

But some industry officials said the cost difference, although narrower, would still attract domestic refiners.

"There won't be much impact. Dore imports will increase day by day. The difference of 1 percent will attract refiners," said Harmesh Arora, a director with the Bombay Bullion Association.

The roughly 700 tonnes of India's annual imports "can be totally converted into the dore market", he said.

India's total annual gold consumption is about 900 to 1,000 tonnes, and the difference is made up mostly from recycling.

Finance Minister P. Chidambaram earlier this month appealed to Indians to moderate their demand for gold, but buyers instead gobbled up a month's worth in a few days - about 50 tonnes - as they saw a duty increase coming.

Indians see gold, both bars and jewellery, as an investment against high inflation, especially in rural areas where banks are practically non-existent and meagre savings rates add to bullion's lustre.

The tax increases had an immediate impact on Tuesday, Rathod said. "No one is asking (to buy) even a gram of gold. But eventually Indian people will get used to it (the new tax levels)."

Analysts said the government's moves might have more impact on investment buying, which is about 35 percent of demand, while the jewellery market is likely to be more resilient, especially in the winter wedding season when brides are weighed down with golden dowries.

"Given India's penchant for gold for weddings and other religious ceremonies, a sharp fall in volumes is unlikely," Nomura analysts wrote in a note after Monday's duty hike.

The danger also remains that hiking duties could encourage smuggling, which has tripled since the import duty on gold was last raised in 2012.

The customs duty on 100 grams refined gold will amount to 18,000 rupees, which is equal to a return ticket to Dubai, Rathod said.

(Additonal reporting by Manoj Kumar in NEW DELHI & Rujun Shen in SINGAPORE; Editing by Ed Davies)