Government needs to get it right on gold imports
For well over two years now, the government as well as various economists have been demonising gold, equating purchases of it with near anti-national activity. It was the Indian craze for hoarding of unproductive gold, the argument went, that had led to the collapse in not just the current account, it was also responsible for the slowing pace of growth as less and less household savings were available for investments. So, in the December 2012 quarter, when gold imports soared from $11 billion in the September 2012 quarter to $17.8 billion, it was pointed out this comprised over 55% of the quarter’s current account deficit. It didn’t help that, in FY12, the proportion of household savings in physical form—gold and land essentially—reached an all-time high of 15.8% of GDP; this fell in FY13, but just a bit, to 14.8% of GDP. As a corollary, household savings in financial form—available for lending or equity investments—fell to a mere 7% of GDP. With the diagnosis so clear, the prescription suggests itself: squeeze gold imports, this will restore both the CAD as well as financial savings, interest rates will fall as there are more savings ... a virtuous cycle, basically.
What then followed was a vicious cycle of import duty hikes—from R300 per 10 grams in January 2012 (a little over 1% on ad valorem basis) all the way up to 10% in August 2013—as well as import curbs; curbs, that finance minister Arun Jaitley told Parliament on Tuesday, ‘apparently seem to have worked’. That, however, is missing the cause for the symptom. For one, when gold imports surged in the December 2012 quarter, it was not this alone that caused the CAD problem; incremental gold imports comprised around half the increased imports and the larger problem was the near stagnation in exports. Two, if households were buying more gold, and less financial products, it was because the economy was tanking—growth collapsed from 8.9% in FY11 to 6.7% in FY12 and 4.5% in FY13—and because inflation made every other saving worthless. To that extent, making gold unaffordable, or unreachable, hurt household balance sheets. What’s also worth keeping in mind is that while household physical savings rose from 10.8% of GDP in FY08 to 14.8% in FY13, this was exceeded by the 6.1 percentage point fall in government and corporate savings. In other words, blaming just households is unfair.
Equally important, as long as global gold prices were rising, to a peak of $1,744 per troy ounce in the December 2012 quarter, imports kept surging even though import duties were hiked. It is when the global growth picture started improving that gold prices began falling, to $1,328 per troy ounce in the June 2014 quarter; and with this, gold imports have also crashed since the returns on gold are either very low or even negative. The temporary hike in the June quarter imports may have unnerved the finance ministry enough to retain import duties/curbs, but with even elevated levels of gold imports, the CAD is likely to be comfortable at under 2% in FY15. A side effect of the curbs, as FE reported Wednesday, is the $7 billion fall in gold exports in FY14. Gold is not the cause of India’s CAD or other problems. It never was.