Both CAD and Indian rupee can handle the additional strain
Given India’s gold imports in the first 8 months of FY14 have only been around $24.4 billion versus $53.7 billion in FY13, and gold prices have crashed by around a fourth in the last one year—from $1,664 per troy ounce to $1,213 today—perhaps it is time for the government to start thinking of easing gold curbs. For one, with the economy doing better, chances are demand for gold will ease a bit, but even if it doesn’t, the combination of lower prices and a more stable rupee will keep imports under control. In any case, it is well accepted that the gold problem would not have been anywhere as severe as it was made out to be had coal and iron scrap imports not ballooned—a result of, respectively, protecting the inefficient Coal India and banning mining—and if exports of iron ore had continued. So the solution doesn’t lie in curbing gold imports, it lies in freeing up the coal sector and getting mining going. Two, the current account deficit can certainly handle any possible strain better—at 1.2% of GDP for the September quarter, this is dramatically lower than the 5% a year ago or the 6.7% of GDP in the December 2012 quarter. Indeed, as compared to FY13’s $88.2 billion CAD, FY14’s CAD is likely to be $50-55 billion. In other words, were gold imports to rise once again, the economy is in a much better position to take care of the problem.
More important, imports of gold did not really slow despite the sharp hikes in duty levels till June 2013—in volume terms, the 338 tonnes imported in the June quarter was the highest in the last 8 quarters. This is despite hiking import duty on gold from a flat R300 per gram to 2% in January 2012, 4% in March, 6% in January 2013, 8% in June and then 10% from August 13. It is difficult to say if imports of gold came down to 85 tonnes in the September quarter because of the further 4 percentage point hike in import duties since January or because of the sharp depreciation of the rupee, both of which would have been partially neutralised by the fall in global prices of gold. The more likely explanation is that, with economic prospects looking better—certainly the global ones are a lot better, suggesting a lifting of Indian growth as well—demand has compressed on its own. How much is not clear since there is enough anecdotal evidence to suggest smuggling is up significantly, so much so that even the RBI Governor has brought this up in a few of his public interactions. Given that this has to be financed through hawala transactions, chances are this means exports of goods or services are being under-invoiced, leading to pretty much the same impact on the CAD. Were the government to start easing gold curbs, policymakers will get a better idea of how the CAD really looks—this was, for instance, the same thing RBI did when it slowly brought back oil demand back into the dollar market some months ago.