Gold has a special place in Indian society. Not only is it a symbol of social status and prosperity but is also closely associated with religious and social events. Indians love to shop for gold jewellery more than anyone else in the world. The consumption is second only to China. India's gold reserves too are among the largest 10 reserves in the world. This results in a lot of gold imports and costs the country precious Foreign Exchange. The approximately 1,000 tons in gold imported by India accounts for a quarter of the country's trade deficit and has prompted the government to introduce several measures to curb demand. Gold assets also lie unused and uninvested in millions of households. This is capital that could potentially earn households handsome returns through investment in the equity and debt markets. In 2013, the government introduced an 8% import duty on the precious metal but demand stayed strong. In the 2016 budget, Finance Minister Arun Jaitley increased the import duty to 8.75% and introduced a 1% excise duty on jewellery sales over INR 200,000 on top of regular sales taxes. This has severely affected demand. The government crackdown on black money too has played its part.
As a result of all these measures, gold demand has considerably weakened. As the chart shows, demand for gold jewellery in the 2nd Quarter of 2016 dropped by almost 20% from a year ago. Jewellers have been protesting the government's efforts and have gone on strike earlier this year. They claim the measures have gone too far and they and their workers are hurting as a result. The government did offer an olive brand by increasing the minimum threshold, to which the additional 1% sales tax is applied, from INR 200,00 to 500,00. Jewellers hope this change in the tax structure and pent up demand during the Diwali festivities will lead to a surge in demand. It will be an uphill task to wean Indians off gold after all.