JOIN USIndia's passion for gold is putting such a strain on state finances that the government may slap higher import taxes on the precious metal, but demand buoyed by heady inflation and meagre savings will blunt the impact of any rise in duties.
Initial success from a tax hike in March last year was stifled by festivals such as Diwali, when gold is a must-give present, and the winter wedding season. That has scuppered New Delhi's goal of reining in spending on gold by around a third to $38 billion in the fiscal year that ends in March, prompting Finance Minister P Chidambaram to say another tax increase could be on the cards.
India is challenged only by China in its appetite for gold, and with nearly all demand covered by imports, the country's purchases are a major factor in global prices.
The latest figures show the volume of imports jumped 48 percent in July-September from the quarter before and were only 8 percent down on 2011. "It is the disease that needs to be cured rather than the symptom," said Munish Dayal, a partner at Baring Private Equity Partners India Limited.
With inflation above 7 percent and the Reserve Bank of India keeping key rates at 8 percent, it's no wonder that a 13 percent rise in domestic gold prices in 2012 looked attractive to so many Indians. India wants to reduce gold's share of its import bill from 11.5 percent -- the second-highest outlay after oil.
The fundamentals supporting demand have helped spur Indians to squirrel away 20,000 tonnes -- about three times the holdings of the U.S. Federal Reserve -- in jewellery, bars and coins.
Only a tiny fraction of this has been tempted out by high prices and hiked import duties to be recycled, which can mean anything from turning grandma's lobe-lengthening earrings into fashionable nose rings or trading in "imitation" coins often used as a kind of gold gift voucher.