India decision to back down on an excise tax on gold jewellery could revitailze gold demand from India. In March of this year, India announced that it would increase import levies on gold, and impose an excise tax on gold jewellery. The moves caused an uproar in India's jewellery industry and led to a nationwide strike by gold merchants. The government was quick to promise that it would review the measures in May, and with the recent decision to formally remove the excise tax, Indian gold demand is expected to recover.
While there are a multitude of factors impacting the gold market, the size of India's gold market should not be underestimated. The following chart clearly shows India's relative size in the gold market.
It should be noted that China has been rapidly growing as a source of gold demand, and is expected to outpace India in 2012. With the decision to reverse the excise tax however, India could yet maintain its top spot.
It seems unlikely that this change alone will reverse the relative stagnation in precious metal prices since late in the first quarter, but it certainly won't hurt. More important will be the ongoing crisis in Europe, the general state of the global economy, and any decision by global central bankers to further ease monetary policy.
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