MUMBAI/LONDON India is likely to cut its gold import duty to 6 percent from a record 10 percent in Thursday's budget, leading to a rise in imports in the second half, a senior official at the country's biggest gold trade group said on Wednesday.
Higher overseas purchases by the world's No.2 buyer of the precious metal after China should underpin global gold prices that have risen almost 10 percent this year, recovering from a 28 percent plunge in 2013.
The drop to 6 percent in import duty "is practical and it may be reduced further. A reduction in import duty may encourage more demand from the consumers", Bachhraj Bamalwa, director at the All India Gems and Jewellery Trade Federation, told the Reuters Gold Forum.
Bamalwa, whose federation represents more than 300,000 jewellers, met Finance Minister Arun Jaitley late last month, and said: "He (Jaitley) seemed very positive and we expect some good news about the industry."
Jaitley's maiden budget will be the first major policy event since Prime Minister Narendra Modi's landslide general election win in May.
Finance ministry officials were not immediately available for comment outside business hours.
Gold imports into India are likely to rise 200 tonnes in the second half to December, a 14 percent increase compared with the first half, Bamalwa said.
However, a weak monsoon could have a negative impact on gold consumption. Nearly 60 percent of gold demand originates from rural areas in India where more than half of the country's 1.2 billion people live.
India imposed restrictions last year on overseas purchases of gold, its second biggest import item after crude oil, to tackle a balance of payments crisis. The current account deficit (CAD) has since narrowed and gold traders expect Jaitley to ease the curbs in his budget address.
Modi, who leads the pro-business Bharatiya Janata Party (BJP), has said any action on gold should take into account the interests of the public and traders, not just economics and policy.
Besides the import duty levied by the finance ministry, the Reserve Bank of India (RBI) also imposed a rule last year that required 20 percent of all bullion imports be re-exported.
The government might remove the 80:20 rule in a gradual, "phased" manner, Bamalwa said.
The rules crimped supply and pushed premiums up to as much as $160 an ounce above London prices in December. The premiums fell to $10 an ounce on Wednesday on expectations of a duty cut, compared to $25 last week.
India paid $54 billion to import 1,017 tonnes of gold in the year ending March 2013, which pushed up the current account deficit up to a record 4.8 percent of gross domestic product (GDP).
Due to the tough gold shipment policy, gold imports have fallen significantly, helping the current account gap narrow to 1.7 percent of GDP in the fiscal year to March 2014.
However, such curbs have also spurred smuggling into India via informal international channels for remitting money.
The World Gold Council reckons that 200-250 tonnes of gold have been smuggled into India since the imposition of import controls. Only 2.5 tonnes of smuggled gold – or 1 percent of the estimated total – have been seized by law enforcement agencies.
"Smuggling will reduce once the import duty reduces and the 80:20 rule is removed. Till such time smuggling will continue...(as long as) there is a price difference in the neighbouring countries," Bamalwa said.
(Editing by Himani Sarkar, Douglas Busvine and Keiron Henderson)