By Mike Maharrey, Money Metals Exchange

Today, India slashed its import tax on gold and silver, a move that could further boost demand for both precious metals in the world’s second-biggest gold market and support higher prices globally. 

The move will cut taxes on gold and silver imports by more than half, lowering duties from 15 percent to 6 percent. 

India will also lower the import tax on platinum to 6.4 percent. 

Government officials hope that lowering the import duty will put a damper on rampant gold smuggling. 

India Finance Minister Nirmala Sitharaman said the goal was to “enhance domestic value addition in gold and precious metal jewelry in the country.”

World Gold Council Indian operations CEO Sachin Jain told Reuters the tax cut is “a massive step in the right direction.”

 “It will reduce the incentives for smuggling of gold. It will create a level playing field for honest industry stakeholders.”

Vignaharta Gold founder and chairman Mahendra Luniya told the Economic Times of India that lowering the import duty could provide "a significant boost" for the gold industry. 

"Lower prices could drive higher consumer demand and increased demand would lead to higher sales volumes, ultimately benefiting companies dealing in gold through improved topline and bottomline performance." 

The price of gold in rupee terms fell 6 percent after the announcement, the lowest level in three months.

Gold was up about $14 in overseas trading after officials announced the tax cut.

Even with the high import taxes, Indian gold demand has been strong. Through the first five months of 2024, gold imports into India increased by 26 percent year-on-year, with 230 tons of gold flowing into the country. This is despite record-high prices.

Even before the tax cut, a recent note by Australia’s ANZ Bank made the case that Indian gold demand could help extend the current gold rally and push the price of gold to $2,500 and beyond.

Indian gold company MMTC-PAMP CEO and managing director Vikas Singh told the Economic Times “Gold in India is more than just a precious metal,” and the tax cut will be welcomed around the country.

“Indian consumers have an emotional connection with the yellow metal, the significance of which comes to the fore on special occasions. Given this cultural context, today’s development in the union budget of a reduction in duty on gold to 6 percent is a welcome move, one which is expected to drive down retail price of the metal. This in turn is expected to set off a virtuous cycle of increased consumption and contribute substantially to the exchequer and facilitate the growth of India as a precious metals hub."

Indians have historically had an affinity for gold. Indian households own an estimated 25,000 tons of gold, and that likely understates the amount given the large black market in the country. Gold is deeply interwoven into the country’s marriage ceremonies and cultural rituals. Indians have long valued the yellow metal as a store of wealth, especially in poorer rural regions. Around two-thirds of India’s gold demand comes from beyond the urban centers, where large numbers of people operate outside the tax system.

Gold isn't considered a luxury in India. Even poor Indians buy gold. According to a 2018 ICE 360 survey, one in every two households in India had purchased gold within the last five years. Overall, 87 percent of Indian households own some gold. Even households at the lowest income levels in India hold some of the yellow metal. According to the survey, more than 75 percent of families in the bottom 10 percent of income managed to buy some gold.

The yellow metal was a lifeline for Indians buffeted by the economic storm caused by the government's response to COVID-19. After the Indian government locked down the country, banks tightened credit to mitigate the default risk. Unable to secure traditional loans, Indians used gold to secure financing. As Indians endured a second wave of lockdowns, many Indians resorted to selling gold outright to make ends meet.

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