How does it affect buyers: Jewellers and analysts said buyers will have to shell out Rs 600 - Rs 700 more per 10 gram of gold in the short term.
Why was the duty hiked: India is the world's biggest importer of gold and the precious metal is the biggest contributor to the import bill after crude oil. India's current account deficit reached an all-time high of 5.4 per cent of gross domestic product in the July-September quarter. Alarmed by the mounting current account deficit, driven by large scale gold imports, the government was forced to raise the import duty on gold.
What is current account deficit: Simply put, India's total imports of goods, services and transfers is greater than total export of goods, services and transfers. A current account deficit is not always bad for a developing country, but in case of India the deficit has reached unmanageable proportions.
Why does the government need to curb deficit: The widening current account deficit has increased India's need for foreign capital inflows and evoked memories of the 1991 balance of payments crisis, when the Reserve Bank of India (RBI) sent 47 tonnes of gold to Europe as collateral for a loan to avert a sovereign default.
Is the government taking other steps: India has been struggling with a trade deficit that has put the country's current account balance under pressure. To revive exports, the government last month extended an interest subsidy scheme for some exporters.
Will the duty help: Industry officials expect only a moderate drop in demand. "It would not have an impact on demand at all because the demand for gold and gold jewellery has remained strong even though the prices of gold have been rising... Gold and property have been two saviours for Indian households in the face of high inflation," Sanjeev Agarwal, CEO of Gitanjali Exports told NDTV Profit.
Where are gold prices headed: Gold on the Multi Commodity Exchange ended up 0.6 per cent at Rs 30,774 rupees after rising as much as 0.9 per cent to Rs 30,847 rupees per 10 grams after the announcement. However, over the medium term, gold prices are headed down, analysts said. "The overall trend is decisively down, so you should head for softer targets. Gold prices may decline by up to eight per cent in the next six months," market analyst Sarvendra Srivastava said.
What's driving the gold rush in India: Fundamental reasons for buying gold -- to hedge against inflation and currency risks -- remain as strong as ever, said Amresh Acharya, director, investments at the World Gold council, a trade body funded by miners.
What else can happen: Industry analysts fear the increase in the import duty could spur smuggling across porous borders. Illegal trade was rampant before restrictions on gold shipments were lifted in 1990.
What's the bottom line: The government's revenue will increase if the imports don't fall. Six per cent duty on gold translates into Rs 15,000 - Rs 17,000 crore revenue collections for the government, Dr Ajit Ranade, chief economist at Aditya Birla Group said.
(With inputs from Reuters)