dna edit: Betting on gold

With Sonia Gandhi speaking up for jewellers upset with the 10 per cent import duty imposed on gold, finance minister P Chidambaram seems to have no option but to ease the import restrictions on gold sooner than he would have wanted to. The import duty hike and other restrictions like mandatory export of 20 per cent of gold imports as finished jewellery had become necessary after the current account deficit spiked to 4.8 per cent ($88 billion) of the GDP in 2012-13. Out of this, the outgo on account of gold imports was a whopping $50 billion. To make matters worse, exports had slid, the rupee was depreciating, India’s foreign exchange reserves were steadily depleting, and the country seemed to stare at another balance of payments crisis. From Rs300 per 10 grams, the import duty on gold was raised to 2 per cent in January 2012, 4 per cent in the 2012 budget, 6 per cent in January 2013, 8 per cent in June 2013, and finally 10 per cent in August.
The measures seem to have worked as the CAD is expected to decline to 2.5 per cent for 2013-14. Gold imports have fallen from a record high of 162 tonnes in May 2013 to just 19.3 tonnes in November. But the lure of gold refuses to diminish; gold smuggling, on the wane and non-existent for nearly two decades, is on the rise again, this time using legal channels too. After the Directorate of Revenue Intelligence began busting smuggling rackets, agents are now relying on passengers returning to India. They can legally carry one kg of gold after paying import duty. In December, 2.5 tonnes of gold entered India in this manner while smuggling accounts for another three tonnes every month. Though gold prices crashed in global markets in 2013, the fall in India was marginal. Thanks to this price differential, “importing” gold in this manner is a profitable venture despite the stiff import duty.
The insatiable appetite for gold — as an investment instrument and as jewellery — has much to do with our poor economic fundamentals. With inflationary conditions and poor regulatory frameworks sapping the potential of most financial instruments and disappointing investors, gold and real estate have proven to be safe bets. Both continue to appreciate at much higher rates than price-rise and the traditional Indian affinity towards land and gold further encourages the hoarding mentality. Though neither gold nor land are productive investments for the national economy, the danger from gold is the forex outgo. Exports have picked up, thanks to the weak rupee. The government’s plan to tackle the CAD through export, FDI and FII inflows besides external commercial borrowings is fraught with many risks. The global economy is far from stabilised. India’s fiscal deficit has also aggravated. Taming the gold-lust requires sustained, long-term action. Interest in the inflation indexed bonds, launched with much fanfare last year, has already flagged. Reviving the credibility and the popularity of such financial investment schemes needs to become high priority. There is no wishing away gold; it has always been a critical store of wealth for most nations; India’s challenge is to strike a fine balance.