Reason: Controlling the Current Account Deficit.
What is Current Account Deficit?
It is the amount by which the total imports exceed the total exports. A country having current account deficit imports more (goods and services) than what it exports and owe the rest of the world from revenues generated within the country.
Why increase import duty on gold?
India imports approximately 900 tonnes of gold per year. That is approximately 20% of Annual Gold Demand of around 4500 tonnes. (Data: World Gold Council, Demand Trends http://www.gold.org/investment/research/regular_reports/gold_demand_trends/ ). As quoted from this article (http://goo.gl/7KXaA) of Live Mint Gold imports constituted 11.5% in India's total imports basket in 2011-12 in value terms, growing from 6.9% in 2008-9.\
This means there is a drastic increasing trend in gold consumption. Gold does not contribute greatly to the real economy of the country - as most of gold imports are for jewelry and coins which get promptly stored in households and safety lockers. See this article by Nilesh Shah on Indian consumers crazy appetite for gold http://goo.gl/lZA2z He warns that if Indians stop buying gold, the gold bullion market may crash (and such a price correction may in fact be welcome)
Can I do something as a retail investor?
Yes, one can reduce the consumption of gold. Or to put in better words - look for investment opportunities other than gold. Because, the gold investment habit of Indian housholds is costing the country dearly in terms of widening the current account deficit. And, Govt. of India, at this point is signalling the same to the investors. It is up to the individual investors to take cue and act accordingly.
