Govt's move on black money to mute gold demand in India: World Gold Council

Gold demand in India will be muted this year after dropping to multi-year lows in 2016, with trading dented as the government pushes to make markets for the metal more transparent and brings in a new tax, the World Gold Council (WGC) said on Friday.

Lower demand from the world's second biggest consumer could rein in global prices that have been trading near their highest in 11 weeks, although it would help the south Asian country reduce its trade deficit.

Gold is a mainstay of Indian culture, serving as the primary vehicle for household savings for hundreds of millions of people in Asia's third-largest economy.

But Prime Minister Narendra Modi has been trying to curb costly bullion imports and stop the metal from being used to hide billions of dollars of undeclared 'black money'. More than two-thirds of gold is bought with cash in India.

Gold demand in the country fell 21.2 percent in 2016 from the year before to 675.5 tonnes as new rules such as those forcing customers to disclose their tax code for purchases above 200,000 rupees ($2,967) dampened demand, Somasundaram PR, managing director of WGC's Indian operations, told Reuters. That was the lowest level in seven years.

Consumption will likely be between 650 and 750 tonnes in 2017, with appetite also hit by the introduction of the nationwide Goods and Services Tax (GST), he said.

Indian demand averaged at 845 tonnes over the last 10 years.

"We believe many of the issues are plaguing the industry ... this is not going to change quickly in 2017 and plus other big transition of GST coming in, it could disrupt trading," said Somasundaram, speaking in an interview as the WGC published a report on gold demand and supply for 2016.

The GST is expected to be rolled out from July.

Somasundaram said that a reasonable level of GST on gold jewellery could bring transparency to bullion trading, but that a rate that was too high could encourage bullion smuggling.

Gold smuggling in India has surged since India raised its import duty to 10 percent in August 2013 in an effort to narrow a gaping current account deficit. In 2016, smugglers brought in 100 to 120 tonnes gold in the country, Somasundaram said.