You are on page 1of 2

Gold is certainly not the culprit. It is the failure of governance on all fronts that has caused this slowdown.

Too much of preoccupation with gold would not boost Indian economy. It requires a neo-reform approach in terms of easing of taxes, rules and reduced presence of bureaucracy if we want the economy to take a turn. The problem is in lack of vision and ability to assess the situation. If this is tackled there would be the turnover and money being invested in gold would find the channels.

India is not among the top 25 gold importing countries.

Gold is not the bane


By Shivaji Sarkar

As the Indian economy goes downhill, the Reserve Bank of India (RBI) echoing the popular sentiment wants to rein in gold imports. The RBI and the government are in sync. Both feel gold import is the only way to check forex outflow and current account deficit (CAD). The RBI also wants the government to set up a gold bank Bullion Corporation of India. It is bizarre. All imports are now channeled through public sector banks. Setting up another entity is to make operations more expensive. The concern over gold is likely to grow further as the Central Statistical Organisation (CSO) slashes growth forecast to 5 per cent from the latest assessment of RBI at 5.5 per cent. The myth is being created that India is importing more gold. It is only partly true. Gold is becoming more expensive as rupee falls and the government has imposed an import duty which has been raised from zero per cent in 1998 to six per cent now. The government claims that it has stemmed the import from $ 56 billion tons last year to $ 38 billion till now this fiscal. In all these statements a critical aspect is being ignored. About 32 per cent of gold about $ 19 billion - is re-exported as jewellery. According to estimates of World Gold Council, the government earned around Rs 2,836.6 crore in 2010 as an import duty on gold. This is miniscule considering the difficulties it makes for jewellery makers as exports become expensive. Can less import of gold really check the growing current account deficit now threatening to touch 5.4 per cent? Officially it can. But a slowing economy and low returns on investment also looks for other avenues. Gold has certainly become an investment tool. It is also not true as often said that it is an unproductive investment. Even gold on the shelf earns higher returns than money put in banks. This is the price a slowing economy pays. Those having money in a rather impoverished society cannot risk losing it. So steps to check gold imports are proving counter-productive. According to intelligence agencies, state gold seizures at airports have risen almost 10-fold in recent months with the increase in the import duty on gold hailed as one of the main culprits. There is some slump in imports through official routes. But traders say it is being met through smuggling, spawning a revival in the trade. Data from the finance ministry shows that between April and June 2012, the customs authorities have seized 200 cases of smuggled gold worth $169 million (Rs 9.4 billion), up 272 per cent as compared to $46 million (Rs 2.4 billion) in the previous year from 20 registered cases. In India, gold smuggling was a thriving business in the 1980s and 1990s, during the Gold Control Act, but it reduced drastically after economic liberalisation. India is one of the big consumers of gold at approximately 900 tonnes a year. But it is nowhere in the list of largest consumers. India is not among the top 25 gold importing countries. The US remains at the top with $ 1150 billion purchases and Brazil at the bottom with $ 58 billion. Even with supposed high consumption Indian purchases were worth $ 56 billion a year back and since then it is coming down.

Even China, which is also showing sluggish development trends, purchased $ 269 billion worth gold. It is the sixth largest buyer after Japan, which spent $ 292 billion. Even not so rich Egypt bought $ 164 billion worth gold almost triple that of India. Why is India so worried or making an issue of gold? It is a clear indication of mismatch in the Indian growth story. And if gold purchases are to be shunned, why should RBI propose to establish a gold bank? The nation it seems is flogging wrong horses. The government agencies need enter yet another business. It is always an expensive proposition. It helps bureaucrats entering into domain which is not theirs. Gold market is well developed and any government intervention is likely to convolute that. Already imports are officially channelled. Any further inroads into that area would cause difficulties to the free market structure. Curbs too would not work. It only boosts smuggling. A myth is being created that gold is the bane of the Indian society. It is not. Entire world is investing in gold during these turbulent times. Even RBI has increased its reserves to 557 tonnes from a virtual empty coffer in 1990. All other countries are increasing their gold reserves. The US has 8133 tonnes, Germany 3391 tonnes, France and Italy over 2400 tonnes, China 1054 tonnes, Switzerland 1040 tonnes, Russia 935 tonnes, Japan 765 tonnes and Netherlands 612 tonnes. The problem is not with gold. It is with functioning of the Indian economy. It is facing a problem of low private demand as high inflation hits every activity including government business. It remains at 59.6 per cent of GDP at current prices against 59.2 per cent last year implying people are putting off planned purchases. Data from 47 banks, according to CSO, accounting for about 95 per cent of all loans show that non-food credit, which includes retail loans for housing and cars grew at a slower rate of 8.6 per cent in April December 2012 against 10.4 per cent last year. Manufacturing is growing at a slow pace of 1.9 per cent and even services sector growth has stymied to 6.3 per cent against 7.4 per cent. It is estimated that a government servant has lost almost 30 per cent of his income to inflation during the last three years. It means his purchases have suffered to that extent.The rising unemployment is further reducing the demand. Though tax revenue earnings are increasing, government expenses on its administrative and even the tax set up grew much more. Gross direct tax collections during
April-January 2012-13 has increased to Rs. 4,55,125 crore as against Rs. 4,25,274 crore during the corresponding period of last year with a growth of around 7.02 per cent. But most of it is lost on increased cost of administrative expenses. Projects costs have multiplied owing to inflation adding to the further slowdown. Gold is certainly not the culprit. It is the failure of governance on all fronts that has caused this slowdown. Too much of preoccupation with gold would not boost Indian economy. It requires a neo-reform approach in terms of easing of taxes, rules and reduced presence of bureaucracy if we want the economy to take a turn. The problem is in lack of vision and ability to assess the situation. If this is tackled there would be the turnover and money being invested in gold would find the channels. Ends

You might also like