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India gold tax hits bridal budgets as smuggling rises

MUMBAI, India--With India's wedding season in full swing, the glass sales counters in Mumbai's famed Zhaveri gold bazaars are crowded with customers eyeing elaborate headpieces, nose rings and necklaces. No one does jewelry quite like an Indian bride, who by tradition wears all the gold she can stand up in and her family can afford.

These days, though, even the most ambitious bridal budgets don't bring the bling like they used to, thanks to hikes in import duties and a rise in local gold prices that have shoppers like Rajanikant Mehta grumbling.

Mehta, who owns a factory outside the capital, had planned to spend about 100,000 rupees (US$1,800) on a necklace for the woman marrying his son late this month, but he's unhappy about what he's getting for his money. Gold prices in India, which imports nearly all its gold, have risen 50 percent over the past three years to about 87,000 rupees, or about US$1,400, an ounce.

Thanks to the new tax and weaker rupee, that's about a 20 percent premium over the world market price, hovering just under US$1,200 an ounce.

“The price of gold should be lower,” Mehta complained. “This is a globalized world. If the prices are similar to the prices elsewhere, then the purchase of gold will increase.”

More gold-buying, though, is exactly what the Indian government is trying to stop by raising import duties three times this year to 10 percent on gold bullion — up from 2 percent in January — and 15 percent on gold jewelry.

Gold is India's second-biggest import behind oil, and purchases have soared in recent years as rising incomes from a decade of economic growth sent Indian consumers on a buying streak.

The problem is that the greater buying of the precious metal has dealt a blow to India's economy by increasing the flow of money out of country compared to inflows. As a result, the current account deficit rose to a historic high of 4.8 percent of India's gross domestic product in the fiscal year that ended in March.

That in turn has helped weaken the rupee by about 10 percent this year, making many products more expensive by raising the cost of oil, priced in dollars, and other raw materials.

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An Indian salesman stands by a counter at a gold jewelry shop in Mumbai, India on Dec. 6.

(AP)

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