The finance minister of India, the world's largest buyer of gold, said yesterday the country must control its spending on the precious metal to balance trade and channel resources to more productive areas.
The comments of Palaniappan Chidambaram, who is on an official visit to Hong Kong, came as India increased its import duty on raw gold to 5 per cent of value from 2 per cent, and processed gold to 6 per cent from 4 per cent.
India and China are the world's two largest gold consumers, accounting for about 45 per cent of gold demand in 2012, according to the World Gold Council in London. India alone imported 223 tonnes of gold in the third quarter of last year, representing just under one-quarter of global demand.
About 80 per cent of India's current-account deficit is due to gold imports. While acknowledging that gold was by far Indians' most preferred avenue of investment, Chidambaram said the demand was putting a heavy strain on state finances.
"If we have gold [mines] in the country then we will have no current-account problems. But we have to import every ounce of gold," he said.
"We want to unfreeze the stockpiles of gold in India and bring it back into circulation. So part of the gold that is lying as idle stock will be unfrozen. Together with the increase of import duty, we hope the import of gold will be moderated."
India's domestic mutual funds, which offer gold-backed exchange-traded funds, will be allowed to deposit part of the bullion they hold with banks to boost availability for jewellery and gem-making.
The new tax may reduce gold demand in Asia's third-largest economy. A spokesman for the World Gold Council described the move yesterday as counterproductive and predicted the flow of gold into India would continue.
"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," he said in an e-mail response to a South China Morning Post inquiry.
Chidambaram also said that the Indian government would not ask its central bank to cut rates to help stimulate economy - just as Japan did.
The finance minister, who is in Hong Kong to woo investors, is upbeat that India's economy will gradually recover.
"Next year, we hope to have a growth between 6 and 7 per cent," he said. The country earlier cut its growth target for this year to 5.7 per cent from 5.9 per cent.
"If the recovery is gathering pace … we should get back to our potential growth rate of 8 per cent [the year after that]."
Additional reporting by Celine Sun