Millennium Post

Bullion merchants hold economy hostage

Swiss banks may not be too happy with India’s latest round of searches for big Indian accounts there. But, largely impoverished India’s endless gold hunt, especially at a time when the global economy and trade are shrinking and stock markets around the world are going topsy-turvy following economic slow-down in China, has placed the Geneva-based World Gold Council on top of the world. India’s gold import last month hit a new 120-day high at nearly $4 billion while all other imports to the country shrank by over 15 percent in value.  The massive gold import by bullion merchants, mostly from Mumbai and Ahmedabad, widened the country’s trade deficit to $11.7 billion in just one month. In the pre-reform period, India’s annual trade deficit rarely topped $5 billion. During the current financial year 2015-16, the total gold import bill alone may come close to India’s total crude oil import cost. The gold import may suck up close to $50 billion, if not more, from the Reserve Bank of India’s modest foreign exchange reserves this year even as the Indian currency is set fall further to Rs 70 for a US Dollar, this year.

It is shocking that drought-hit India, suffering from staggering foods shortage and rising prices, should be allowed to waste billions of dollars in importing gold to whet the appetite of a section of its rich mainly to convert their liquid asset and go for festive spending binge. Should India waste its scare foreign exchange resource in gold import when it is in great demand for India’s development projects. India is borrowing large amounts in hard currencies from overseas markets to meet mostly its developmental needs. Corporate India’s annual external commercial borrowings (ECB) alone are well over $100 billion. There is also large forex outgo every year to service foreign borrowings. Spending such large amounts of foreign exchange on luxury gold imports would ordinarily make little sense. Inexplicably, the government is doing practically nothing to arrest the drain of precious dollars in gold and luxury imports. This is more so when India’s merchandise exports are projected to drop by over $100 billion in 2015-16.

Despite the country’s projected seven-percent-plus GDP growth in the current fiscal, the country’s economy still looks uncomfortable, if not shaky, for various reasons. Lately, India’s stock market had crashed to the levels before Narendra Modi formed the BJP-led NDA government at the Centre in May 2014. The worst may not be over. The stock market is witnessing a huge of flight of overseas hot money that kept heating BSE and NSE for the last 19 months since this government came to power. Surprisingly, among the important commercial decisions made by the new government within months of its operation was the reduction of import levies and restrictions on gold imposed by the previous UPA government. According to reports, the easing of gold imports was a pre-election promise Modi had made to the bullion trade.

Interestingly, powerful bullion merchants managed to impress not only Modi but also the UPA chairperson, Sonia Gandhi, on the need to ease tariff restrictions on gold import well before the Lok Sabha election when the UPA was in power. Following representation from gold merchants, Mrs. Gandhi had reportedly even asked the then Commerce Minister, Anand Sharma, to look into the matter and take appropriate action for easier gold import during a brief absence of P. Chidambaram, Union Finance Minister, who was out of the country to attend the World Economic Forum annual meet at Davos in Switzerland. Chidambaram, who raised the tariff barrier for gold in 2013 to reduce trade deficit and stabilise the economy, stood his ground on return. Though bullion traders managed to draw sympathy from both Sonia Gandhi and Narendra Modi, they had to wait until Modi came to power for easier gold import against the country’s overall economic backdrop that suggests a careful use of India’s scarce and hard-earned foreign exchange resources.

Few will contest that large gold imports can destabilise the economy, if not spell a disaster for India over a period of time. The impact was first felt during 2011-12 when $65 billion worth gold was imported in India. In the following year, the bullion import amounted to $54 billion creating a massive strain on India’s balance of payments. The country’s current account deficit (CAD) rose alarmingly to 4.8 percent of its GDP in 2012-13. Almost 50 percent of the BoP gap was on account of gold import that year. Economists normally hold that gold divert savings out of the formal financial system. 

Though India’s savings rate is impressive and on par with Asia’s “tiger economies”, almost half of those savings are now being diverted into physical assets by the rich. The ratio has been getting worse as if the country is moving backwards. The eroding exchange value of Rupee, falling stock market, surplus real estate constructions, slower than expected economic growth rate, sharply falling exports and increasing foreign borrowings seem to have shaken the confidence of the rich in the government and its policies. They seem to be investing in gold like never before. Over 700 tonnes of yellow metal or almost a third of the world’s annually mined gold is being consumed in India. This can’t go on forever under any circumstances and logic. Gold purchase is weakening Rupee and economy.

One solution to the problem is to make sure that more people have access to the formal financial system. And, that needs to be supported by a series of hard options. For instance, hike in interest rates will encourage savers in bank savings against gold. The gold bond issue may not turn out to be a right option. The shortage of food items such as pulses and wage goods should be immediately tackled through adequate duty-free imports. The retail consumer prices must be stabilised as quickly as possible. Raising indirect taxes and levies on non-luxury items will be primitive and add to retail inflation. Import dumping has to be tackled. And, both tariff and non-tariff barriers must be raised to control gold and luxury imports. At the same time, smugglers and bootleggers need to be severely punished. 

(Views expressed are strictly personal) 
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