Given the 40%-plus annual increase in gold imports (in rupee terms) for the last few years, finance minister P Chidambaram is understandably worried about the impact of this on the current account deficit (CAD). Indeed, while gold contributed about 20% to the trade deficit between FY07 and FY09, this rose to nearly 30% between FY10 and FY12, RBI’s latest report on gold points out. According to RBI, the trade deficit without net gold imports would have been 2.1 percentage points of GDP lower than the 10% of GDP recorded in FY12. Which is why the finance minister has hinted at the possibility of hiking import duties on gold if people don’t lower their consumption of gold. Though given how, RBI data tells us, gold is by far the most attractive investment option—between January 2008 and May 2012 it gave cumulative returns of over 270% versus around 80% for the Nifty—it’s understandable why people are investing in gold. In which case, the finance minister may well have to hike import duties on gold, and hopefully his tax sleuths will ensure smuggling levels don’t rise to take advantage of the resultant rise in arbitrage.
But looking at gold in isolation is incorrect, more so since gold is at the same time a consumption as well as an investment product. And if we can look at the impact of gold on the current account deficit, why not look at the impact of oil imports, more so since they are higher than they should be due to excessive subsidies keeping effective prices low—despite the collapse in the economy, oil consumption hasn’t fallen—and due to falling oil and gas production in the country. In any case, even a cursory look at the data makes it clear the real culprit is not the rise in gold imports, but the fall in overall exports. Between Q1 and Q2 of the current year, exports fell from $76.7 billion to $69.8 billion, or $6.9 billion while the current account deficit rose $5.9 billion—only $1.4 billion of this was due to the rise in gold imports. Two or three broad trends, highlighted in our page one story, point to this very trend. RBI points out that, as a ratio to the CAD, gold imports were a whopping 106.4 in FY08 and this fell to 71.9 in FY12—the average for the first half of FY13 is, BoP data show, 50%. As a proportion of the balance of trade, gold imports were around 28% in FY11, 30% in FY12 and 21% in the first half of FY13. What made things worse was that, while exports contracted, the traditional bulwark—services, especially software services—has begun to fail. From $17.7 billion in Q4 FY12, net service exports fell to $15.6 billion in Q2FY13. As a proportion of the balance of trade, net service exports were 49% in Q4 FY11 and 32% in Q2FY13. While the finance minister’s exhortations, or hard talk, may get gold imports to slow, this is hardly going to fix the CAD problem.