MUMBAI/SINGAPORE (Reuters) - Gold demand in India is expected to be robust in 2014 and likely to encourage an increase in smuggling if curbs on bullion imports remain, the World Gold Council (WGC) said.
Indian gold consumption is expected to be 900-1,000 tonnes in 2014 for jewellery and investment purchases, according to the WGC. That is slightly behind top gold buyer China, whose demand is expected to be 1,000-1,100 tonnes.
Bullion demand in India rose 13 percent last year to 974.8 tonnes, according to the WGC's quarterly report issued on Tuesday, in a sign that consumer appetite has been largely unaffected by government restrictions on gold imports.
Struggling with a high trade deficit and a plunging rupee, India was forced to impose curbs on gold, which is the second-biggest expense in its import bill.
A record high import duty of 10 percent and a rule tying import quantities to export levels have crimped supply in what was until a year ago the world's biggest bullion consumer, prompting a sharp jump in smuggling.
"Despite all the curbs, demand has come in at 975 tonnes. The question obviously is where the supplies came from," said Somasundaram PR, WGC's managing director for India. "We have seen anecdotal evidence of smuggling. Our estimate is 150-200 tonnes, more towards the upper end."
Smuggling could have been even higher as Indian gold imports have sagged in recent months to 20-30 tonnes a month, compared with a record 162 tonnes in May. Scrap gold is also being used to meet demand.
India's official gold imports in the first 11 months of 2013 totaled about 655 tonnes.
"If supply restrictions continue, then we will see a much higher figure for smuggling," Somasundaram said, declining to provide an estimate.
Indian gold smugglers are adopting the methods of drug couriers, stashing gold in imported vehicles and using mules who swallow nuggets to try to get them past airport security.
Customs officials have said that though they have increased the number of seizures, they have been able to catch only a fraction of the illegal shipments into India.
The Indian finance ministry and the central bank have acknowledged that smuggling has increased considerably but have said they will not ease the rules until they have a better grip on the trade deficit.
"All pointers are towards some kind of relaxation," Somasundaram said. "One possibility is that they will wait for the current account deficit figure till March end. The next possibility is that they may wait till elections (in May), but our expectation is that it will happen sometime before."
Reducing the import duty alone will not be enough to ease supply constraints, the WGC executive said. An easing of the central bank's 80/20 rule, which requires a fifth of all imports to be re-exported, will have more of an impact, he added.
Global gold demand fell 15 percent in 2013 as huge outflows from physically backed investment funds outweighed record consumer demand, London-headquartered WGC said in the report.
By contrast to India, top buyer China is likely to introduce reforms to make it easier for consumers to access gold in the growing market, said Albert Cheng, WGC's head of the far east region.
China made a string of changes last year, including granting approval to its first gold-backed exchange traded funds and for import licences to foreign banks for the first time.
"It is a measure to make sure that there are more suppliers. I think there will be a further opening up of the market," Cheng said, though he didn't elaborate.
Chinese demand in 2013, which soared 32 percent to 1,065.8 tonnes, was supported by significant growth of both manufacturing and the retail network, and that will continue this year, Cheng said.
(Editing by Muralikumar Anantharaman and Jane Baird)
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