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India’s gold import tax faces off with tradition

Age-old customs called a drain on nation’s economy

The gold items in a Mumbai, India, shop, got a shopper’s attention. India is the world’s biggest buyer of gold.

Rajanish Kakade/Associated Press

The gold items in a Mumbai, India, shop, got a shopper’s attention. India is the world’s biggest buyer of gold.

MUMBAI, India — India’s steep new tax on gold imports does not deter Mousumi Rao as she holds up a glittering $5,000 filigree necklace that could adorn her daughter on her wedding day. Rao’s 12-year-old is at least several years away from marriage.

Since tradition demands a bride practically drip with gold jewelry, it’s never too early for an Indian family to start preparing, particularly with the high cost of gold these days.

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‘‘I’m collecting things for her now so when she grows older and marries, I should have enough gold for her,’’ said Rao. ‘‘It is very auspicious for us, one of the most auspicious things, to give gold to your daughter.’’

Gold has been deeply entwined in Indian culture for thousands of years. Today, India is by far the world’s biggest buyer of gold, and those imports are an increasing drain on an economy that is growing too slowly to reduce widespread poverty. Last year Indians imported 864 tons of gold, about one fifth of world sales. The cost of $45 billion was second only to India’s bill for imported oil. The unquenchable appetite for gold coins, bars, and jewelry has swelled India’s trade deficit and weakened its currency.

The government can not do much about oil imports — without fuel, the economy would grind to a halt — so in the past year it has tried to rein in gold demand, raising the import duty three times in a year to its current level of 6 percent. The higher tariff is proving little match for age-old tradition.

‘‘Now is the wedding season, and I’m seeing an increase in demand no matter about the tax,’’ said jeweler Arun Kaigaonkar. ‘‘Prices have been rising for years, and still people buy.’’

In January, sales spiked sharply as jewelers and investors rushed to buy ahead of the import tax increase to 6 percent, which took effect at the end of the month.

The culture of gold is so strong in India, “it’s difficult to contain this demand by just tweaking import duties,’’ said Samiran Chakraborty, an economist for Standard Chartered Bank in Mumbai.

Through centuries of warfare and the shifting borders of regional kingdoms, gold was the safest currency. In some Hindu legends, Brahma, the god who created the universe, was born from a gold egg. In India, gold is spiritual and it is ­also practical. Parents of the bride give gold as a symbol of prosperity. But it is also an insurance against a bad marriage, since the jewelry is the wife’s.

In early 2011, an ounce of gold cost $1,375 on the world market. It now costs more than $1,600 an ounce .

‘‘India is not only the world’s biggest importer of gold, it’s the biggest hoarder of gold,’’ said Albert Cheng, a managing director of the World Gold Council, which estimates there are 18,000 tons of gold locked in bank vaults and family homes across the country.

Standard Chartered’s Chakraborty said such ‘‘nonproductive’’ gold in India is worth about $1 trillion, about half of India’s GDP.

The government recently stopped requiring gold-backed exchange-traded funds to hold physical gold in the amount of their sales. Instead, the funds will be allowed to deposit some gold with banks who in turn can lend it to jewelers, which should curb imports for a time.

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