Budget 2012: Don't buy gold, go for silver instead

Will higher prices make Indians give up their gold lust?

Maybe, maybe not. But Finance Minister Pranab Mukherjee has decided that has to at least make an attempt. That’s why in his Union Budget speech, he announced a hike in customs duty on standard gold to 4 percent from 2 percent. The customs duty on non-standard gold was also hiked to 10 percent from 5 percent.

In contrast, branded silver jewellery was exempted from excise duty.

The measures are likely to lower appetite for gold, while improving demand for silver, according to experts.

“One of the primary drivers of the current account deficit has been the growth of almost 50 per cent in imports of gold and other precious metals in the first three quarters of this year,” Mukherjee said in his Budget speech.

The country imported a record 969 tonnes of gold in 2011. In addition, global gold prices soared to a record high of more than $1900 an ounce on fears of a growing eurozone sovereign debt crisis.

Gold and silver imports are India’s biggest imports after petroleum, and have played a key role in inflating the country’s import bill. A depreciating currency – the rupee tumbled by 16 percent against the US dollar – exacerbated the problem.

The maximum impact is likely to be felt on jewellery demand. A Reuters report said that jewellery exports like Rajesh Exports and Titan Industries would also be negatively affected since their input costs would rise.

Still, don’t expect demand to completely evaporate among gold-lusting Indians. If the price of gold rises, many Indians will continue to find it a good investment bet, although currently equities have also roared back into fashion.

The precious metal is currently trading around Rs 27,700 per 10 grams.