Elections for seven legislative assemblies were held in 2012.
As with most Indian elections held until then, the rupee weakened against the dollar just before elections. And immediately after the elections, the rupee strengthened (http://www.dnaindia.com/money/1658877/report-has-the-rupee-been-kept-weak-artificially).
Is the same phenomenon repeating itself this time as well? Curiously, even some foreign institutional investors almost as if on cue began talking about how India could slip back to 1991.
It was perhaps such prophecies of doom that compelled none other than Kaushik Basu, chief economist, World Bank, to announce in Delhi that India’s economic problems, including a wide current account deficit, could not be compared to India’s 1991 balance-of-payments crisis.
Two days later, the finance minister echoed Basu’s statements.
But many marketmen continued to squirm at the manner in which policy decisions have been taken. True, gold imports need to be looked at, as they had climbed 68% during April-July 2013 to 383 tonnes (approximately $15.8 billion) compared to 205 tonnes in the corresponding period last year.
But why increase duties to 10%? Officially, gold imports have declined. But smuggling has increased, which weakens a domestic currency, as any gold dealer will confirm. So, is that what India’s policymakers want to do?
Did nobody realise that gold and jewellery is also exported? Or that this sector employs some 35 lakh people? Does the economic health of a country improve if exports and jobs are jeopardised?
As might be expected, the Gems & Jewellery Export Promotion Council confirmed last week that gold jewellery exports had fallen 70% to $441.4 million, during the year ended July 2013. Gold medallion and coin exports had also fallen 64% to $112.8 million during this period.
For an industry where India is trying to make its mark in the world, the imposition of duty was indeed a harsh blow.
Instead, why couldn’t the government invite gold in private hands (or with temple trusts), estimated at 25,000 tonnes, to be deposited with the RBI? Gold could be returned after say 5 years – volume-for-volume – and still earn 1% interest (http://www.dnaindia.com/money/1855442/column-policy-watch-from-gold-to-dust-if-the-government-has-its-way).
The government could charge a 2% VAT for selling that gold to domestic gold traders. That would be cheaper than the 10% Customs duty on gold. India’s goldsmiths could then purchase gold from the government, thus rendering smuggling unattractive.
Take another figure. Import of electronics accounted for just 6.7% of total imports during 2012-13.
That is nothing to be worried about. And if one looks at India’s net invisible trade, which includes foreign exchange used by travellers to purchase TV sets, and the amount companies could take overseas to purchase assets, it has climbed from just $9 billion in 2000-01 to $111 billion in 2012-13.
Why did the government hike duties on TV sets, reduce the duty free allowance of foreign travellers and cut the amount companies to take overseas? Was someone in the government trying to create a sense of panic?
If the government wanted to reduce forex outflows, it could have ordered the CBI to find out why Petronet paid $12 per mmbtu for LNG it imported from Qatar when the US could import it from the same source at $3? That would have saved the country over `30,000 crore annually, year on year.
Or it could have cleared manufacturing proposals, including steel, that would have achieved several objectives – they would bring in foreign direct investment (FDI); India could then export finished products instead of intermediates like iron ore; they would have created jobs. At worst, they would have reduced India’s steel import bill which stood at $7.8 billion last year. Collectively, FDI proposals worth over $26 billion are stuck for approvals.
Obviously, the last thing the country needs is for the rupee’s weakening to be used to justify the sale of bearer bonds.
Undoubtedly, that would please India’s benami account holders immensely. It would also frustrate the Supreme Court’s monitoring of how benami accounts are dealt with.