Gold enjoys a pre-eminent position in the Indian culture from ancient times. It was continually targeted by invaders for its prized gold treasures and was popularly known as “Sone ki Chiriya” ( a bird of gold). Interestingly it is rumored that the first words uttered by Columbus on mistakenly reaching the Americas instead of India were “where is the gold”. Even recently, tons of gold ornaments valued at about $22 Billion were recovered from the vaults of one of its ancient temples, many still remain.
After such a long association with Gold as a status symbol, a measure of wealth, currency and the famed jewelry, are the Indians going to give up their lust just because the massive Current Account Deficit (CAD) run up is proving a major strain on the economy. The answer is a big No.
In addition, its perceived safety in the present tough times and superior performance against comparable asset classes over the last few years is further driving the general interest in it.
India remains one of the largest importers of Gold in the world more so as its indigenous production is insignificant while the demand is growing at an astonishing rate of 39% per annum (2011-12). This puts a severe constraint on the Balance of Payments (BoP) situation and its related impact on the foreign exchange reserves.
In the past three years the Gold imports have contributed about 30% of the CAD, up from average 20% in the preceding three year period (2006-07 to 2008-09)
The worsening CAD and a sudden depreciation of the Rupee made a worried Indian government resort to a slew of strong quantitative and fiscal measures like banning the import of gold coins, making export of 20% of the imported gold mandatory , increased the import duty on gold to 15% etc. The Prime Minister & the Finance Minster even appealed to the public to reduce their consumption of Gold in the national interest.
While the curbs are taking effect as is visible in declining imports but the moot point is that its doing nothing to curb the demand for gold. The strong fascination remains which is resulting in increased smuggling, which had become negligible due to liberal government policies.
The government expects the annual consumption to drop to about 800 tonnes from about 850 tonnes last year but it will come at a substantial cost to transparency in the system.
It will be better if it moderates its restrictive regime and looks at a multi pronged solution. It should include addressing the basic underlying issues afflicting the economy, Gold backed financial products as also harnessing the large reserves of gold with the common house holds by offering them a decent coupon and its assured return. Simultaneously the accounting for Gold as investment, which is a fact, can move it into the Capital Account, relieving a huge pressure off the CAD, though the BoP issues will remain.
