With spiralling demand for gold draining huge amount of foreign exchange, government on Monday hiked the import duty on it from 4 to 6 per cent, a decision that immediately sent prices shooting up.
Simultaneously, the government also raised the duty on platinum by a similar percentage from 4 to 6, Economic Affairs Secretary Arvind Mayaram told reporters here as government appealed to the people to moderate their demand for gold.
Shortly after news of the duty hike, gold prices shot up by Rs 315 to Rs 31,250 per 10 grams and markets sources say it may go up to Rs 700 per 10 grams in the short term.
For the second time in a year, the import duty on gold has been hiked to check the spiralling trend of gold imports leading to a record current account deficit that has a cascading effect on various economic fronts including distorting the balance of trade.
Finance Minister P Chidambaram had on January 2 indicated the coming hike in duty when he said the government would be left with no choice but to make import of gold a little more expensive.
In a bid to channelise gold holdings into institutional channels, Government also proposed providing a link between Gold Exchange Traded Fund and Gold Deposit Scheme.
The objective is to unfreeze or release a part of the gold physically held by mutual funds under Gold ETFs and enable them to deposit the metal with the bank under GDS.
The government had in the Union Budget for 2012-13 raised import duty on gold to four per cent from two per cent. This came on back of import duty being changed to an advoleram rate of 2 per cent in January instead of a fixed duty of Rs 300 per 10 grams.
Asked if today's move would lead to rise in prices, Mayaram said, "Prices would be a concern to us if this prices was to impact inflation. Gold is not part of inflation index."
He said the advantage would be that a part of gold lying in stock would be brought in circulation and would practically meet the requirements of the gems and jewellery trade.
"It is hoped that, consequently, there will be a moderation in the quantity of gold that is imported into the country," he said.
India spent a whopping USD 56.5 billion on gold imports in 2011-12 and USD 38 billion in the first nine months of current fiscal.
The hike in duty may moderate demand in the world's largest bullion buyer that has seen prices jump 7.1 per cent in 2012.
Outflow of the foreign exchange on gold imports is impacting country's CAD, which has widened to USD 38.7 billion or 4.6 per cent of the GDP in the first half of the current fiscal.
About 80 per cent of the nation's current-account deficit, the broadest measure of trade, tracking goods, services and investment income, is due to gold imports, according to the Reserve Bank of India.