Save economy, stay off gold, says FM

Finance minister P Chidambaram has a simple solution to bring the economy back on track: People should stop buying gold for a year.

The unusual suggestion, made by the finance minister on Thursday, shows the helplessness of a government struggling to rein in the current account deficit – the difference between a country’s imports and exports – which is at an all-time high.

“I once again appeal to everyone to resist the temptation to buy gold. People think they are buying gold in rupees, actually they are buying gold in dollars... If for one year there are no gold imports, it will change the current account deficit story of the country,” said Chidambaram.

He said people should rather invest in financial instruments such as mutual funds and government bonds to safeguard their investments against inflation. At a time when stock markets and mutual funds have failed to fetch good returns on investments, gold is seen as a lucrative investment by many.

The yellow metal was the second-largest commodity in India’s import basket at $53.8 billion in 2012-13, after crude oil imports at $169.3 billion in the same year. “People who are financially well-informed should put their savings in financial instruments and other savings instruments rather than gold,” Chidambaram said.

India, the largest consumer of gold in the world, imported 142 metric tonnes and 162 metric tonnes in April and May 2013, respectively. To check imports, the government increased import duty from 6% to 8% earlier this month. While imports are expected to come down in June due to the tax revision, the Indian consumer’s penchant for gold fluctuates on a seasonal basis, and spikes during the wedding season.

To discourage people from investing heavily in gold, the Reserve Bank has also placed restrictions on overseas purchases on a consignment basis and limited imports for local consumption against cash only. It has also asked banks to not give advances against gold exchange traded funds (ETFs) and units of gold mutual funds.

The measures come as the rupee plunged to a record low of Rs 58.16 against the US dollar last week, making imports even more expensive. The depreciation of the rupee has been on account of an increasing current account deficit, which is expected to be around 5% in 2012-13 and over 4% in the first quarter of 2013-14.

How buying gold hurts the economy
Investing in gold turns your money into an illiquid asset. Consequently, this money cannot be used by banks or the government to invest in job-creating projects.

To import gold from the international market, India has to make payment in US dollars.

Higher imports mean more foreign currency goes out of the country, which hits the economy.