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Tuesday, 16 April 2013 00:35
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Indian Express editorial


Gold crash could be a turning point for India

With gold prices hitting a two-year low at $1,384 an ounce, Brent crude at a nine-month low and threatening to go below $100 for the first time since early July, and copper at a 12-month low, India's macro picture looks better than it has for a long time. While Monday's fall in gold prices won't get reflected till the first quarter of FY14, data for the fourth quarter of FY13 looks better anyway, since there has been a 23 per cent fall in gold imports. Since gold imports account for around half of India's current account deficit (CAD) in terms of value — while FY13 CAD is estimated at $100 billion, gold imports are likely to be around $50bn — a fall in gold imports is good news for the CAD and, therefore, for the value of the rupee.

While events such as the Cyprus crisis and the slowing of the US economy in recent months, due partly to the sequester, looked like they could push up gold prices again, the underlying US trend is a positive one. As a result, Goldman Sachs has lowered its forecast dramatically. On February 25, it lowered its 2013 forecast from $1,810 per ounce to $1,600 and that for 2014 from $1,750 to $1,450. A little over a month later, on April 10, it lowered this further — to $1,450 for 2013 and $1,270 for 2014. And while the US recovery is leading to lower gold prices, China's slower than anticipated growth is ensuring that commodity prices are finding new lows — the US fracking revolution is helping accelerate the trend as far as oil is concerned. In February, to cite one number, of the $4.4 bn fall in India's import bill, around $0.8 bn was due to lower crude oil prices and $2bn or so due to lower gold imports.

None of this is to say that the CAD is no longer a problem, just that it is more manageable. Despite the 4 per cent hike in February exports, for instance, April-February exports were down 4 per cent year-on-year. And this, in turn, was due to a sharp reduction in the share of manufacturing exports — India has just six items in the list of the top 50 global imports. Coal imports, thanks to environment bans and Coal India's destructive monopoly, used to be 0.5 per cent of the GDP in the pre-Lehman years and are now around 1 per cent of the GDP. Even more worrying is the collapse in FDI — of the $32.5 bn CAD in FY13's third quarter, just $2.5 bn was funded through FDI. The collapse in gold prices has given India much-needed breathing space but the imperative to increase exports and FDI flows remains urgent.


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