India strives to undermine its gold bugs

India’s finance minister has called for the South Asian giant to curb its external purchases of bullion in order to balance the country’s current account and improve resource allocation.

The South China Morning Post reports that Palaniappan Chidambaram made the comments during an official visit to Hong Kong, as India raised its import taxes on the precious metal.

India has lifted its import duty on raw gold to 5% from 2% and on processed gold to 6% from 4%.

News of the beefed-up taxes put a dampener on gains in gold prices in Tuesday trading spurred by the Bank of Japan’s announcement of an increased commitment to stimulus spending.

China and India are the world’s two biggest consumers of the precious metal, jointly accounting for around 45% of demand in 2012.

India now seeks diminish its role as a leading gold consumer in order to balance its trade accounts and alleviate the burden on state finances. Around 80% of India’s current-account deficit is the result of its gold imports.

India will also put some of its gold stockpiles back into circulation to mitigate external demand.

A spokesperson from the World Gold Council believes that the Indian gold duties are counter-productive, as the predilection for gold amongst South Asian investors is a deep-rooted cultural trait:

Placing heavy duties on imports will not solve the problem. The centuries-old cultural affinity that Indians have with gold means that they will continue to invest in gold to meet their emotional, cultural and financial needs, regardless of government intervention