Millennium Post

Never too easy to read his mind

When Narendra Modi made one of his first thoughts on the required changes in the country’s economic policy public before he was sworn in as the prime minister, it was about the need to ease gold imports. The PM-designate’s views seemed to have immediately served as a pointer to the administration which the UPA left behind for Modi to inherit.

Modi’s reference to easing gold import probably made some top bureaucrats in the finance and commerce ministries to privately liken Modi to UPA chairperson Sonia Gandhi when it came to exhibiting passion for the yellow metal. The UPA chairperson took an unprecedented step writing directly to the union commerce secretary to ease gold import, including duty reduction, when the then finance minister P Chidambaram was briefly away to Switzerland to attend the World Economic Forum meet. Sonia Gandhi had never indulged earlier in written communication with bureaucrats over the heads of ministers in her 10-years as the UPA chairperson.

The UPA chief’s letter surprised all. Chidambaram was visibly angry and stuck to his guns hardening gold import norms to belatedly tackle the alarmingly high current account deficits (CAD) the government was saddled with since 2010. Modi too had surprised all by suggesting the need for easier gold import soon after leading his party to a landslide victory.

However, drawing a similarity between Narendra Modi and Sonia Gandhi on the issue of their ‘common passion’ for gold was possibly the most stupid thing, which both the Reserve Bank Governor Raghuram Rajan and Commerce Secretary Rajeev Kher learnt within weeks after Modi became the PM. Of the two bureaucrats, Rajan was cleverer. On 20 May, RBI issued a new guideline for gold import that allowed few select trading houses, in addition to already permitted banks, to procure the precious metal to ‘boost exports.’ RBI’s export-linkage clause, the biggest irritant before gold merchants outside the higher import duty, remained untouched.

While Modi was probably happy with Rajan’s half-action that gave an impression of easing import norms in keeping with the new PM’s wishes to please the country’s largest bullion trading and jellewery export community, Gujaratis from Surat, Ahmedabad and Mumbai, Commerce Secretary Kher went public with his rather unrealistic and uncalled for recommendations for lowering import tariff and export linkage probably to please the PM, knowing fully well that such measures could be risky, if not damaging, under the existing national economic environment of slow growth, fear of higher oil import bill due to violence in Iraq, pressure on farm import in the case of inadequate and uneven monsoon.

Kher had gone on record to recommend days before Finance Minister Arun Jaitley presented his maiden national budget for this fiscal that import duty on gold be reduced and the export linkage be eased. The commerce secretary, who might have wrongly read the mind of the prime minister and that of the finance minister, pitched for easing of the gold import norms to increase the availability of the metal in the domestic market. He said his ministry had spoken to the finance ministry on the matter and it was ‘under their consideration’. Further, he held that ‘there is a need of rationalisation in (gold import) duty and (gold import) procedure.

We have already made it clear that there is a need to look at the current gold import regime.’ Kher had gone to the extent to say, ‘if you feel that the initial concerns of CAD are fully addressed, as we hope to in the next several months, then there will be a reason to restore or at least to some extent the (earlier) position (on gold imports)’ and added that ‘there is a clear perception that there could be something that could have to be done. It will happen in Budget.’

Actually, nothing happened in the budget, which carried the PM’s imprint in most areas of the government policy. Nothing changed. Neither the punitive import duty, nor the RBI-imposed 20:80 scheme under which an importer has to ensure that at least one-fifth, or 20 per cent, of every lot of imported gold is exclusively made available for export purpose and the balance for domestic use. Both the PM and the FM might have rightly agreed that time was not yet right to relax the gold import rules without risking their impact on the current account deficit, Rupee’s international exchange rate, the stock market and, consequently, on India’s sovereign rating, FDI inflows, domestic saving and inflation with a possible weaker Rupee raising the prices of imports.

Ironically, despite high import tariff and unchanged export linkage, gold imports by India, the world’s second-largest user, jumped 65 percent in June, widening the nation’s trade deficit to an 11-month high, Gold shipments surged to $3.12 billion in June from $1.89 billion a year earlier. The trade deficit widened to $11.8 billion, the highest since July last year.

Unlike Sonia Gandhi, whose interest in higher import of gold to fill in the appetite of the rich, Prime Minister Modi’s mention of gold soon after his election victory was probably meant for the ears of lakhs of Gujarati Jhaveris, Shahs and Mehtas, the well-known names in the bullion and jewellery trade, who have strongly supported BJP candidates in Gujarat, Mumbai and other centres. Gujarat’s diamond traders were grateful to Modi for having visited China personally two years ago to get released two of the traders falsely arrested there on charges of stealing after the UPA government failed to bring them back. However, this time, Prime Minister Modi was not expected to sacrifice the national interest to please those traders. The unprecedented imported gold rush between 2009 and 2013, made the country look like a banana republic where almost a third of the population lived on less than Rs 60 per day and the nuevo rich spent billions of dollars to convert black money into gold or hedge their asset value in the face of economic downturn and falling Rupee. Under the UPA regime, gold became the second largest import item after petroleum, unsetting the export-import balance and putting the country under severe economic stress. More than 80 per cent of imported gold went for private hoarding leaving a small portion for export manufacture.

Even Home Minister Rajnath Singh too may have read Modi wrong on the fate of the UPA’s pet project, Aadhaar card for direct transfer of central subsidies and cash assistance to the bank accounts of ultimate targets. His ministry wanted to junk Aadhaar to promote the National Population Register (NPR) identity cards. The PM not only retained the Aadhaar project but promised legal status to it. Modi, Jaitley and other BJP top guns were fully aware that in 2010, 2011 and 2012, the gold import value was higher than the government expenditure on urban development, housing and family welfare put together. Gold import was the single biggest hindrance to the growth of the financial sector.

Finally, the government and RBI had to step in to impose severe restrictions on gold imports to check burgeoning current account deficit and sliding rupee. What should worry the government and the country is that despite the continuing import restrictions, gold import had once again shot up at the record level in June this year.
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