Will economic growth estimates go wrong for fiscal year 2017?

Unproductive gold imports accompanied by tepid oil imports have heralded a weaker GDP growth for the future


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Developing nations like India need to continuously import to keep fuelling the economy and therefore rising oil imports indicate prospects for stronger economic growth.

While crude oil keeps the engines of growth running smoothly, imports of gold are a drag on the balance of payments and are largely unproductive. Gold is traditionally used as a store of wealth and therefore rising bullion imports indicate increase in idle savings rather than investments. Gold imports have risen in January and February. In February, gold imports stood at $3.6 billion, up a massive 147% from a year ago. Oil imports rose 60% from a year ago to add up to $25.44 billion in the same month.

A greater rise in gold imports than that of oil in the past has resulted in gross domestic product (GDP) growth falling in that quarter and also the quarters that follow. For instance, in the December quarter of fiscal year 2013-14, gold imports had risen sharply by more than $4 billion from the previous quarter while oil imports fell almost 20%. GDP growth for that quarter slipped to 6.1% from 8.1% in the previous quarter.

While the relationship between oil imports, gold and economic growth is tenuous at times given the complex interlinkages between these imports and the exchange rate, unproductive gold imports accompanied by tepid oil imports have heralded a weaker GDP growth for the future.

Given that gold imports have jumped in January and February while oil imports have grown by a smaller margin, perhaps the sanguine forecasts on GDP growth need a relook. Add demonetization to the mix and economic growth in FY17 may look different from the 7.1% forecast by the Reserve Bank of India.

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