An effort to control gold import and bring down the hunger for gold was made in last year’s union budget by raising import duty on gold and also a small excise duty on gold jewellery. However, with strong noise raised by the gold ornaments makers and the fear of a public rejection of the policy, these steps were partially rolled back. However, this week the union finance minister, P Chidambaram once again reiterated that import duty on gold could be raised in the next budget. He is thinking of these steps because gold imports are proving to be unsustainable.

According to the latest RBI figures, current account deficit has widened to 5.4 percent of the GDP, which is a record high in recent years. This is because exports have contracted during the year, as opposed to substantial rise in the corresponding period last year. Imports have also fallen but much less and therefore the trade deficit — that is, the difference between merchandise exports and imports — have increased rapidly.

The situation is not likely to turn around much either. Indian exports are sliding because of the continuing slackness in the global economy and fall in global trade. Until recently, North America and European Union were the major destinations form exports and Indian exports went to these countries. These economies facing continuing economic uncertainties, Indian exports cannot reasonably be expected to rise.

It is in this context that the RBI and the finance ministry are seeking to control the imports of gold into the country. Gold has emerged as the second largest import item after petroleum products and oil, the attention is to clamp down up on gold imports. After all, you cannot possibly drastically cut down oil imports as that will bring the entire economy to its knees. But cutting down gold imports will in fact help the economy as funds spent on gold imports should be available for more productive purposes.

Importing gold into the country means transferring our savings to overseas and that too by converting the foreign exchange inflows that come into the country. These transactions have major macro-economic fall-out. Imports of gold will mean that instead of using our national savings through investments in building productive assets or spending on social sector capital building, we are encouraging economic activity overseas in the countries from where gold is being imported.

On the other hand, imports would mean converting Indian savings into hard currencies, which depress the value of the Indian rupee against the dollar and other major currencies. Depreciation of the rupee makes all imports costlier including oil, which impacts inflation rate as well as government finances. Thus, large gold imports leave its footprint on the financial markets and thereby affect the economic prospects.

Faced with these compulsions, the Reserve Bank is suggesting formulating more schemes for gold-backed schemes for attracting savings. Essentially, some investment opportunities could be created so that the returns should be such that these would become more attractive to place surplus money than into gold. RBI has suggested inflation indexed investment schemes, which should offer the investor real return on savings. Alternatively, some investments products representing dematerialised gold could also meet the gold hunger of the ordinary investors.

The munificence shown earlier towards gold imports by liberalising the gold imports by returning Indians is now proving to be counter-productive. Reserve Bank has strongly recommended that these large baggage allowances for gold imports should be curbed. In fact, these should be done away with. Public sector banks and metals importers, once again public sector trading enterprises, were allowed to import gold and sale to buyers against cash. These need to be scrapped immediately, because such imports not only adds to the balance of payments burden, these are in effect opportunities for generating black money transactions. All these ill-advised relaxations should now be summarily discarded.

Hence, the emphasis on containing gold imports. However, while the ill effects of gold imports are clear to policy makers and economists, ordinary people hardly care for these arguments. For them, gold is a purchase of choice whenever there is a little surplus money available. Thus, there are reports that anticipating a good harvest this rabi season, farmers across India are said to be planning to buy more gold in the form of jewellery. They believe gold to be the ultimate store of value and currently 70 percent of the Indian gold demand is driven by rural areas. There is need for social communication.

Unless India changes its preferences for gold, both as economic policy measures as well as by changing the social value system regarding gold, the country will sink under the weight of gold. (IPA Service)