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Business News/ Opinion / Online Views/  India’s mysterious love affair with gold
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India’s mysterious love affair with gold

The sharp rise and fall of gold imports in the current year defies logic

The budget for 2013-14 proposed a new financial instrument that would be indexed to inflation—targeting those who buy gold as a hedge against inflation. Photo: Priyanka Parashar/Mint (Priyanka Parashar/Mint)Premium
The budget for 2013-14 proposed a new financial instrument that would be indexed to inflation—targeting those who buy gold as a hedge against inflation. Photo: Priyanka Parashar/Mint
(Priyanka Parashar/Mint)

If you look at the latest analyst advisories, you may be mistaken into believing that finance minister P. Chidambaram is making too much about gold imports. This is because most of them say gold imports are declining and, hence, implicitly argue that the love for the precious metal has peaked as far as India is concerned.

The analysts are right when they say that at the end of January the cumulative imports of gold have contracted. But, they have missed a trend; actually gold imports have bounced back and alarmingly at that—so much that they have all but wiped out the deficit that was glaring till the end of September; the contraction of imports in the current fiscal over 2011-12 is a little under 4% at the end of January, while at the end of September it was a little over 30%.

So chief economic advisor Raghuram Rajan was right when he told journalists immediately after presenting the Economic Survey for 2012-13, “We cannot do anything much about oil imports, except probably passing on the prices to the consumers. Coal imports are also required for power generation. What we can curb is gold imports."

His apprehension is totally appreciated with the country’s current account deficit (trade deficit together with net invisibles such as repatriations) on the balance of payments (BoP) is at an unsustainable 5.4% of gross domestic product; to get a sense of proportion it is way above the levels that prevailed when India had its BoP crisis in 1990-91. Effectively, India is skating on thin ice here. Given that exports are unlikely to show a sharp pick-up, especially in the context of inclement global trade conditions, the solution to India’s BoP problem has to be structural in nature.

Not surprisingly, therefore, the budget for 2013-14, presented the next day, proposed a new financial instrument that would be indexed to inflation—targeting those who buy gold as a hedge against inflation. The jury is still out on whether this would be enough to curb India’s legendary appetite for the yellow metal.

This apart, the import trend in the current year raises some uncomfortable questions about the nature of these imports. First, with the exception of July, imports dropped for every month of 2012-13 till September; after that they have risen every month at an accelerated pace; in November the growth was over 100%, though it has eased up over the next two months. Second, this steep V-shaped fall and then rise beats any easy explanation, especially since the finance ministry raised the import duties to curb demand and the rupee witnessed depreciation in this phase—both of which push up import costs. Third, a lot of these gold imports seem to be accruing from West Asia; despite the appetite of expat Malayalees for gold, the abrupt ebb and then rise in imports defies accepted logic.

I asked a finance ministry official whether he suspected something else to explain the erratic trend in imports of gold. The official was, however, sanguine and dismissed theories that suggest that some of these imports may be money laundering or round tripping of money made through illegal means in India. To be sure, these are speculations and presumably the finance ministry official knows better.

Nonetheless, the fact remains that the sharp rise and fall of gold imports in the current year does defy logic and can’t just be explained away as a love-hate relationship of the country with the yellow metal.

Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com

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Published: 10 Mar 2013, 04:46 PM IST
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