Indian Policy Advisors Discourage Buying Gold

Report says government-guaranteed instruments should be pushed instead...

THE TOP policy advisory board in India, the Prime Minister's Economic Advisory Council headed by C Rangarajan, has urged government to discourage Gold Bullion imports into the country and rather channel savings into formal financial instruments, writes MineWeb's Shivom Seth in Mumbai.

The Council made the recommendation in its review of the economy that the government discourage gold purchases and instead provide incentives for investment in financial assets because gold accentuates the current account deficit and hence, import of the yellow metal is unsustainable.

India imported 969 tonnes of gold in 2011, up from 958 tonnes in 2010. Since the country has one of the highest saving rates in the world – estimated at around 30% of total income, 10% of this is invested in gold. The government has been notified that it is important that the financial sector tap into this huge saving reserve, since many households with high levels of savings are looking for investment opportunities.

The review, details of which are awaited, has major significance in India since the finance minister is set to present the Union Budget in early March. Any proposed budgetary measures will dampen gold imports and affect physical demand.

Rising prices of the precious metal, over 60% in Dollar terms in the last couple of years, has bloated the country's import bill causing uneasiness among policy makers. The current account deficit is expected to be around $160 billion in the current year, with gold imports closer to $50 billion.

Massive gold imports have rung alarm bells with Indian economists, investment bankers and analysts stating that India's fascination with gold could be a reason why growth appears to be flagging. The gold import bill is expected to touch $100 billion by 2015-16, industry body Assocham (Associated Chambers of Commerce and Industry) has said. 

"Calculated on the basis of CAGR of period 2010-11 over 1999-2000, the gold import bill could total $100 billion soon. At these levels, gold imports are a huge burden on the balance of payments and accentuates the current account deficit," said Assocham secretary general D S Rawat.

In a report, the chamber has said extensive education campaigns should be undertaken – particularly in rural areas – to minimize propensity towards gold. Post offices, which have been hawking gold, should instead sell government guaranteed instruments to the rural population.

Being the largest importer of gold in the world, India accounts for nearly one-third of the world's annual Gold Bullion demand. Terming the current gold import as a huge burden on the balance of payments, Assocham said India's total gold imports during the past financial year has been higher than the gross domestic product of 12 states and exceeded the country's estimated budgeted expenditure on fertilizer and food subsidies.

"Equally astounding is the fact that India imported more gold than the annual budgeted estimated expenditure outlay on water supply urban development and sanitation," added Rawat.

The Assocham report follows another by India's central bank, the Reserve Bank of India, which noted that the country's current account deficit is a cause of concern because of its rigid gold and oil demand.

The pressure is mounting on all sides. Gold imports have already contracted – the October to December 2011 gold imports were down 44% and the import duty recast in January 2012 also ensured a slump. Traders added the drop in the current quarter could be 4% to 10% less than the previous quarter ended December.

On January 17, clearly to discourage gold imports, a notification was issued by the customs department of the finance ministry changing the import duty on gold to 2% of value from a fixed rate per 10 gram earlier.

"Gold imports could fall to 220 tonnes in the first quarter, down from 286 tonnes of the previous year. Falling gold imports will reduce demand for Dollars, aiding the rupee's appreciation against the greenback," said M Desai, bullion trader. 

Gold and silver imports during April to December 2011 aggregated $45.5 billion, 54% more than the year earlier, data from the commerce ministry data showed. 

"During the early nineties, a period when the Indian economy faced a severe balance of payment crisis there has been a shift in the approach of the gold policy. The restrictive policies made way for a more a liberalized gold market, which was in the interest of consumers. But a new look at the forex reserves of some of the countries shows that India's forex reserves are 8.81% of China's forex reserves, yet its gold demand is more than that of China by 37.6%," said P Shah, investment banker.

Moreover, he added, if one takes into account gold as a percentage of forex reserves, despite India being the largest importer of gold in the world, its share in total reserves is lower than that of the USA and UK. In terms of GDP too, India's GDP is just 27.7% of China and a meager 11.0% of USA. 

Moreover, a look at the Budget Estimates of some of the key development and non-development expenditures shows that it is only in education where the budgetary allocation is more than that of the gold import value for the year 2010-11. Economists and advisory bodies of the government have said that the foreign exchange resource that is used to import gold reduces the availability of this free exchange to finance the import of other commodities. Hence, it needs to be curtailed to help increase the productive capacity of the economy.

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