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Government goes after gold

If the retail price of gold rises further, it will make it an attractive commodity for smuggling
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First Published: Wed, Jan 02 2013. 02 45 PM IST
Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
Updated: Thu, Jan 03 2013. 12 57 AM IST
A facile but rather misguided diagnosis for India’s rising current account deficit (CAD) is to lay the blame on gold imports. It is, of course, an attractive proposition. In fiscal 2011, gold imports were responsible for roughly half the CAD of $21 billion, amounting to roughly 1.2% of gross domestic product (GDP). Barely two years later, finance minister P. Chidambaram repeated this assertion on Wednesday.
“Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserves would have increased by $10.5 billion. I would, therefore, appeal to the people to moderate the demand for gold which leads to large imports of gold. I may add that we may be left with no choice but to make it a little more expensive to import gold. The matter is under government’s consideration.”
This does not help. For one, CAD is a macroeconomic problem with deep roots at the individual and household level. The insatiable demand for gold is because it is a safe and low-risk investment option that consistently yields higher returns when compared with other assets such as stocks and bonds. Unless this is addressed, gold imports will continue unabated. As such, investment in gold is a rational investment decision by individuals in what is an otherwise bleak investment scenario.
The government can, of course, take policy steps to make gold import unattractive. But if the retail price of gold rises further, it will make it an attractive commodity for smuggling. The danger of further policy perversions in the wake of this is very real. In the 1970s, when gold smuggling was rampant, control measures such as the Gold Control Order, 1963, the Gold Control Act, 1968 and, finally, the Conservation of Foreign Exchange and Prevention of Smuggling Activities (Cofeposa) Act, 1974, were unleashed. The only thing they enhanced was the profit from smuggling and official corruption.
It has been stated, including in this paper, that financing India’s rising CAD exposes the country to the mercy of foreign investors. There is an obvious solution to this problem: petrol, oil and lubricant imports are a far more potent reason for the deteriorating CAD. Why not rationalize these imports by appropriate pricing policies? This is an obvious corrective measure the government can take. And it won’t lead to economic perversities seen in an earlier age.
Are higher import tariffs on gold a solution to India’s rising CAD? Tell us at views@livemint.com
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First Published: Wed, Jan 02 2013. 02 45 PM IST
More Topics: Gold | imports | Chidambaram | deficit |
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