NEW DELHI/MUMBAI (Reuters) - India has increased import duty on gold by a third to 8 percent as the government of the world's biggest buyer of bullion seeks to halt a surge in demand that threatens to widen a record current account deficit yet further.
The increase was announced a day after the central bank acted to force domestic jewellers to buy only on a cash basis and is expected to slash imports, which had hit 162 tonnes in May, twice the monthly average of 2011 when they reached a record.
"The import duty on gold has been raised to 8 percent," D. S. Malik, spokesman at the finance ministry, said. A formal notification was issued later.
A combination of sliding global prices and regional festivals that traditionally call for gold as gifts prompted frenzied buying in April and May, mirrored in the world's other major bullion buyer, China.
The price fall wiped out the impact of the government's January increase in import duty to 6 percent and the central bank's move in mid-May to make buying on credit more difficult.
But after a meeting on Monday between the government, central bank and financial market regulators, Finance Minister P. Chidambaram said imports must be checked again.
"In June-July we will see a sharp drop in imports. In April and May we imported around 300 tonnes. In June and July imports would be around 90 tonnes," said Prithviraj Kothari, director with RiddiSiddhi Bullions Ltd, a wholesaler in Mumbai.
The actively traded gold for June delivery on India's Multi Commodity Exchange (MCX) was 1.83 percent higher at 27,500 rupees per 10 gram as buyers scrambled to make purchases before the duty comes into effect on June 6.
The reaction in spot gold was muted, with traders saying the potential for lower imports to India was already reflected in the price, which fell nearly 1 percent on Tuesday after the Reserve Bank of India extended import restrictions, already applied to banks, to all nominated agencies and trading houses.
Gold is the second most expensive import for the country after crude oil. The government also worries that large amounts of savings locked up in gold curtail liquidity and therefore investment in infrastructure and other drivers of the economy.
"This continues to demonstrate that the Indian government is determined to reduce gold imports into India. Clearly they'd like to stimulate the local market and get people mobilising reserves within India as opposed to importing them," a London trader said.
India has for centuries relied on gold for savings, dowries and as a display of wealth. As banks have made few inroads into rural areas and consumer inflation is high, it remains the investment of choice for many.
Some warned that the duty increase would simply encourage smuggling, something Chidambaran has also warned about.
"This is not going to help reduce import but smuggling will increase ... From the last few months all the wrong decisons are being taken by the government to tackle gold imports," Mohit Kamboj, president of the Bombay Bullion Association, said in a statement.
Additional reporting by Siddesh Mayenkar in MUMBAI and Jan Harvey in LONDON; Writing by Jo Winterbottom; Editing by Anthony Barker