That the UPA government is gripped by an existential crisis on the economic front is by now passé. On the heels of a slowdown, which appears now deep-seated, with the first quarter GDP figure of 4.4 per cent being a pointer, the economy is now plagued with twin deficits fiscal and current account besides infrastructure constraints, policy inertia and unacceptably high consumer inflation.
As the prime reason for the unsustainable current account deficit is attributed to gold imports which had cost a hefty $50 billion in fiscal 2012-13, the question of the hour is how to prune this inessential but inelastic demand for the yellow metal particularly in the face of a growing demand for gold!
It is small wonder that in making a suo moto statement on the current economic situation in Parliament on August 30, Prime Minister Manmohan Singh asserted for the first time ever that “clearly we need to reduce our appetite for gold”. But this is easier said than done in a country where the use of even a milligram of gold by ordinary people has now become unavoidable, leave aside the burgeoning preference of the middle and lower-middle income people to stock up on gold and gold jewellery for troubled times when no other financial instrument of durable return is available.
It is not that the authorities remained impervious to the growing gold-induced crisis in the economy as they had been jacking up the import duty on gold during the last couple of years from insubstantial impost to 10 per cent in a serious bid to stanch the flow of gold into the country both for the jewellery export industry and the ordinary consumer. All pleas of Finance Minister P Chidambaram to curtail demand for gold met with a cold reception. How else could one explain the undiminished demand for gold?
Even as the entry/import of gold into the country is made by nominated banks/entities/agencies through cargo and by passengers through baggage rules as per eligibility, subject to foreign trade policy, RBI guidelines and the customs clearance procedures, there is no let-up in demand for gold.
In a written response to a query in Lok Sabha on August 16, the Minister of State for Finance JD Seelam admitted that the country’s import of the yellow metal which amounted to 845 metric tonnes during 2012-13, was 384 tonnes during the first quarter and the first fortnight of July 2013! As for the patrons of bullion, there is no virtue in moderation and they do not pay heed to appeals as long as they get the right returns on the modest investable resources they have.
While the demand management for gold from people risks becoming counter-productive, there is a robust $43 billion gem and jewellery export segment. The industry is labour and import intensive and if the import duty gets progressively hiked with the rupee value under sustained attacks, it would set off a real crisis demanding bailout operations from the authorities. So, to balance the competing demands of consumers and industry, proposals to include permitting commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners are rife. This is aimed at curtailing imports and rendering the current account deficit manageable so that the attack on the rupee is mitigated.
The assumption is that with 31,000 tonnes of commercially available gold in the country in a variety of forms, which is worth $1.4 trillion at current prices, diverting even a tiny part of that to refiners would meet the indigenous demand for the metal. The apex bank is reported to be discussing this with commercial banks which would be directed to buy back the jewellery, bars and coins for rupees. But the lenders (bankers) will have to fork out more plausible rates than pawn shops and jewellers to attract sellers.
Though parallels are made to using the country’s gold for meeting the sovereign government’s international obligations as it supervened in 1991 when India flew 67 tonnes of gold to Europe to preclude a debt default, the new proposal under way is altogether different.
Here the people themselves part with their gold under no duress and get better bargains. This helps the domestic jewellery traders and exporters by earning much-needed foreign exchange reserves. This apart, talks are also on as to look at the possibility of monetizing gold holdings.
Incidentally the central bank, RBI, holds 557.7 tonnes of gold in its own reserves. Both these options are not as controversial as the one of pledging /mortgaging gold abroad and as such the authorities can appeal to the better sense of the citizens in their individual social responsibility to ensure that the yellow fever does not cripple them from thinking rationally and in defence of the economy which is in dire straits today.
In a country where sentiments are accorded importance, it would be difficult to disabuse people on the futility of investing their assets in an unproductive and utterly meretricious metal like the gold, which JM Keynes dismissed as a relic of the barbarian era.
So it is up to the government to make available a menu of investment options for savings so that people do not put their faith or money in a precious metal that is now playing havoc with the economy.
The writer is a Delhi-based freelance journalist