The Government’s attempts to make Indian consumers cut back on their gold purchases through exhortations and threats of higher customs duty, haven’t really worked.

At least this is what data on Indian gold demand from the World Gold Council show. In the December 2012 quarter, the one for which the current account deficit hit a record, Indians purchased gold valued at $14.5 billion. It was 22 per cent higher than the preceding quarter and a significant 44 per cent jump over the same period a year ago. Now, why did Indians buy more gold in this quarter even as the Government was urging them not to?

One reason probably had to do with gold prices. The December quarter captures Diwali sales of jewellery. Unusually, subdued gold prices may have prompted buyers to make purchases that they put off earlier.

But another explanation for the jump in gold imports seems to be that buyers stocked up on it, anticipating a hike in customs duty. With the Government issuing frequent statements about the ill-effects of gold imports and its intention to curb them, investors and bullion traders seem to have bunched up their purchases in the December quarter, expecting that gold would soon become dearer. By doing so, they pre-empted the customs duty hike, which was announced in January.

Evidence of this is available from the break-down of gold sales in this period too. Nearly $6 billion of $14.5 billion in gold sales in the December quarter came from gold bars and coins, and not jewellery.

Bars and coins

Bars and coins are modes preferred by bullion traders and investors rather than wedding or festival buyers. In fact, bars and coins made up as much as 42 per cent of Indian gold purchases in the December quarter, compared with the usual 30 per cent.

Market experts have also noted that the impact of such hoarding on the import bill. Ambit Capital says in a research note: “The spurt in gold demand in the third quarter is likely to be a result of importers’ front-loading imports in anticipation of the Government’s decision to increase import duties….as well as the result of pent-up demand from the first half manifesting itself.”

It also notes that gold imports accounted for an unusual 14 per cent of India’s merchandise imports during the December quarter, against the five-year average of 9 per cent.

In any case, people who bought gold in December timed it well, with the Government announcing a hike in customs duty on gold from 4 per cent to 6 per cent in January.

That must have made investors who had gold stashed away in their lockers, quite happy.

(Inputs from Arvind Jayaram)

Aarati.k@thehindu.co.in

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