India's gold imports could fall in the immediate aftermath of the government's doubling of import duty but the world's biggest buyer of bullion is unlikely to be deterred for long by the four percent levy, industry and analysts said.
Customs duty on gold and platinum will rise effective March 17 after Finance Minister Pranab Mukherjee announced the move on Friday as part of measures to cut the deficit in his 2012/13 budget.
"One of the primary drivers of the current account deficit has been the growth of almost 50 percent in imports of gold and other precious metals in the first three quarters of this year," Mukherjee said.
The country imported a record 969 tonnes of gold in 2011 -- inching up from 2010 -- and scorching prices had already been expected to keep overseas purchases flat this year.
"This (higher duty) is not good. It will reduce demand for gold significantly," Bombay Bullion Association President Prithviraj Kothari said.
Gold demand in India had already started to falter this year because of a rally in global prices. Gold spot prices touched their highest level for this year at the end of February around $1,790 per ounce.
"If prices stay at current levels with four percent duty, then we can see up to a 20 percent drop in imports," said a Mumbai-based dealer with a state-run bank, who declined to be named.
Physical dealers said Indians were buying gold on Friday ahead of the duty hike although volumes were small.
The World Gold Council (WGC) said imports could be hit initially as families took in the budget's impact on finances.
"There will be a lag on demand due to duty hikes as household budgets will get re-calibrated after the budget," said Ajay Mitra, managing director with the WGC for India and the Middle East.
For graphic of India, China gold demand, click http://r.reuters.com/xem66s
Many Indian families buy gold as an investment in a climate of high inflation and crimped real interest rates. Gold is also an integral and important part of weddings, often representing the wealth of a bride and acting as her security.
The country's jewellery demand last year stood at 567.4 tonnes against investment demand of 366 tonnes, WGC data shows.
"It (duty) will have more effect on jewellery demand," Kothari said and added that imports through illegal channels would rise.
Jewellery manufacturers who import pure gold to make into necklaces, rings and bracelets for export will lose their competitive edge because of the higher raw material costs.
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India had already hiked the gold import duty by 90 percent in January and the government had not been expected to make another increase in the budget.
Its main suppliers are South Africa and Australia.
"We believe this is a short-term measure that the government has taken to shore up revenues and will not necessarily dampen demand in the long term as jewellery buying is part of the Indian culture," Mitra added.
If India's imports remain at last year's level the government would earn about 108 billion rupees from the duty. It is hoping for total tax receipts of 10.8 trillion rupees.
The Mumbai-based dealer said the impact of the duty hike could be alleviated by further falls in global prices.
"In the international market prices are falling. If they fall by another five to six percent then the price drop will compensate for duty hike," the dealer said.
Spot gold was quoted down 0.7 percent at $1,646.60 an ounce by 1045 GMT, having lost more than 3 percent so far this week.
U.S. April gold futures were down 1.07 percent at $1,641.80 an ounce.
In India, the most-active gold future for April delivery on the Multi Commodity Exchange (MCX) was down 0.18 percent at 27,655 rupees per 10 grams.
"Over the long term scenario, we don't see it altering the reason why people buy gold in this country," said Chirag Mehta, fund manager at Quantum Gold Fund.