By Rajesh Kumar Singh, Siddesh Mayenkar
India'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 the arrival of major 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.

But market participants say that would do little to dull gold's lustre for most Indians, especially with bullion prices heading north.

And the finance ministry would ideally like imports to be around $30 billion, an economic adviser there has told Reuters, with industry experts dismissing this as little more than wishful thinking.

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% 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% and India's central bank keeping key rates at 8%, it's no wonder that a 13% rise in domestic gold prices in 2012 looked attractive to so many.

Add to that a near total lack of banking facilities in rural areas, where about 69% of the 1.2 billion population lives, and it's easy to see why Indians would rather invest in bangles than bonds.

India wants to reduce gold's share of its import bill from 11.5% - the second-highest outlay after oil.

The petroleum bill, while inflated by subsidies, is largely unavoidable for such a huge economy that imports 80% of its oil needs and is growing around 5.5% a year, but the government sees money tied up in gold as dead investment.
Courtesy: Mine Web