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NEW DELHI (Reuters) - Officials are in discussions to cut a record high import duty on gold and relax rules on exports, government sources said, after the measures helped narrow the country's trade deficit and now threaten to encourage smuggling.
India imposed the curbs last year when overseas gold purchases - the country's second most expensive import after oil - pushed its current account deficit to a record and undermined the rupee currency.
With three duty hikes last year to a record 10 percent and onerous restrictions tying purchases to exports, official arrivals shrank almost 90 percent in the six months to November, helping China displace India as the world's top gold buyer.
The decision to cut the import duty is likely to be taken anytime this month, said one of the government sources, who has direct knowledge of the deliberations but did not want to be named because of the sensitivity of the issue.
With the current account deficit much reduced and little impact seen on the rupee from the U.S. Federal Reserve's decision to cut back stimulus, the time may soon be right for authorities to make it easier for gold-hungry Indians to buy.
"Earlier, we had argued that we should wait for the Fed's decision on tapering its monetary stimulus. After the Fed's decision, we are not left with any strong argument," said another source with direct knowledge of the deliberations.
The Fed trimmed its monthly bond purchases at the end of 2013 with little impact on the rupee.
India's current account deficit is now likely to be less than $50 billion in the year to March 31, 2014, down at least $20 billion from earlier estimates, the second source said.
Even the governor of India's central bank, whose insistence that 20 percent of gold imports be exported as jewellery has hurt the most, has suggested there may come a time for change.
"Once we feel more comfortable with the current account deficit, once we have a sense the tapering, at least the threat of it, is behind us, we will certainly consider unwinding some of these distortionary actions," Raghuram Rajan said last month.
He had also said smuggling would rise if curbs on gold imports continued for too long.
Indians are smuggling in more bullion than ever as buyers seek alternative sources of the metal, which is often given as gifts at weddings and festivals in the country.
Between April and September, customs officials seized nearly double the amount of illegal gold taken in the whole of 2012. The World Gold Council estimates about 150 to 200 tonnes may be smuggled during 2013, on top of official demand of 900 tonnes.
India's official imports were 21 tonnes in November, down from 2012's monthly average of 72 tonnes and sharply below the record of 162 tonnes hit in May, according to Thomson Reuters GFMS.
The supply crunch helped drive Indian gold premiums to a record high of $160 an ounce over London prices in early December, versus about $1.30 to $1.50 an ounce in Singapore.
Jewellers, who estimate India's monthly demand to be nearer 60 tonnes, have been asking for a duty cut to 8 percent and have the backing of the main opposition Bharatiya Janata Party, which is leading in state polls ahead of national elections due this year.
A final decision lies with Finance Minister P. Chidambaram, who has so far resisted a cut but shifted last week to say he was in favour of continuing "some restraint" on imports.
N. R. Bhanumurthy, an economist at Delhi-based think-tank the National Institute of Public Finance and Policy (NIPFP), said: "We have unaccounted imports of gold that are much more damaging for the overall monetary system. It actually creates a huge problem for monetary policy.
"Now when they have come close to a comfort level on the current account deficit, there is definitely a need to review this import duty."
Additional reporting by Siddesh Mayenkar and Suvashree Dey Choudhury in MUMBAI; Editing by Himani Sarkar