Gold demand in India is likely to remain below its 10-year average for a third year in 2018 as higher taxes and new transparency rules on purchases may cap last year’s rebound in buying, the World Gold Council (WGC) said on Tuesday. India is the world’s second-biggest gold consumer and lower demand there could rein in global prices that have risen 8 per cent since mid-December, although a drop in imports of the metal would help India reduce its trade deficit.

Gold consumption in 2018 will likely be between 700 and 800 tonnes versus 727 tonnes last year, Somasundaram PR, the managing director of WGC’s Indian operations, said on Tuesday. Indian demand has averaged 840 tonnes over the last 10 years. Gold demand will lag because of a higher goods and services tax (GST) on bullion purchases imposed in 2017 and measures to track gold purchases, he said.

In July, the GST on gold was raised to 3 per cent from 1.2 per cent. India has also made it mandatory for customers to disclose their tax code, or Permanent Account Number (PAN), for high-value gold purchases. The government moves have disrupted the business of the small jewellers that accounts for nearly two-thirds of total sales, Somasundaram said.

"More changes are coming in like hallmarking, responsible gold sourcing, all this will continue to disrupt the industry ... It will take two years for India to reach normal demand level," he said. Gold is the primary vehicle for household savings for millions in India. Gold demand in the country rose 9 per cent in 2017 from 2016 to 726.9 tonnes, as jewellery demand increased 12 per cent from a year ago, the WGC said in a report published on Tuesday.

India’s imports of gold dore jumped 73 per cent in 2017 from the year before to a record 245.7 tonnes as the import tax on the semi-pure alloy made by miners is 0.65-per cent lower than on refined gold, Somasundaram said. Dore imports will remain robust even in 2018 due to the duty difference and huge installed refining capacity of 1,450 tonnes, he said.

Gold smuggling has surged in the country since the import duty was raised to 10 per cent in August, 2013 in an effort to narrow a gaping current account deficit. Smugglers brought around 120 tonnes of gold into the country in 2017, with nearly the same amount expected in 2018 unless the government reduces the import tax, Somasundaram said.