CAD remains very much under control
With the near doubling of gold imports in September, to $3.8 billion from $2 billion in August, the government is said to be re-looking the import curbs—finance minister Arun Jaitley has said he didn’t want to spoil the festival cheer, and will look at the proposal once Diwali is over. Once the 80:20 rule for imports of gold by nominated agencies was relaxed—of the imports, at least 20% has to be re-exported—the argument goes, gold imports surged. The finance ministry’s revenue department has apparently flagged the issue with both the department of economic affairs as well as with the central bank. Bringing back import curbs, as this newspaper has consistently argued, is retrograde and should be resisted.
For one, it is not as if imports are anywhere near the problem they used to be even a year ago. In the quarter-ended June 2013, imports reached a record 352 tonnes and had an import value of $16.5 billion—imports were a lower 255 tonnes in the quarter-ended December 2012 but, with the value of gold very high, they touched an all-time high of $17.8 billion in that quarter. In contrast, in the September 2014 quarter, imports were $7.6 billion, not much higher than the $7.1 billion in the quarter-ended June 2014. Chances are, the spurt in growth was related to the need to meet the festive demand and imports will once again slow this month. What buttresses this view is that the 80:20 rule was relaxed in May, but demand didn’t spurt till the festive season. But even if demand doesn’t moderate immediately, let’s keep in mind the current account deficit (CAD) is currently forecast to be in the $37 billion range or a comfortable 1.8% of GDP—to put this in perspective, the CAD was 4.7% of GDP in FY13. So there is really no need to panic.
If you ignore the September spurt, there is a distinct pattern to the imports, and that is one correlated with poor economic growth prospects in both India and overseas in the past—both are now on the upswing. Between quarters-ended December 2011 and December 2012, when global growth prospects were poor and the world was awash with QE liquidity, gold prices rose from $1,683 per troy ounce to a high of $1,744. During this period, while the returns on investing in gold were rising, there were few other investments in India that gave anywhere near the same return since inflation levels were also high—FDs yielded a negative return. Given this, it was perfectly rational for households to stock up on gold. As US growth prospects have improved, and QE has been wound down, gold prices have steadily collapsed all the way to $1,281 per troy ounce in the quarter-ended September 2014. Not surprisingly, gold demand in India appears to be trending down—coupled with the decline in gold prices, the trending up of stock markets will ensure demand for gold is kept in check. In such a situation, reintroducing gold curbs will unnecessarily panic markets and, to the extent this strangles even the genuine—non-speculative—demand for gold, this will just drive up smuggling premia. Between FY12 and FY14, as the Shome committee notes, gold smuggling rose 15 times in response to more gold curbs—that’s something finance minister Jaitley will do well to keep in mind.