FM hints at making gold imports costlier to contain CAD
Worried over the widening current account deficit (CAD), in a large measure owing to rising imports of gold, Finance Minister P. Chidambaram, on Wednesday, indicated that steps were under consideration to render its imports ‘a little more expensive’ to curb demand for the yellow metal.
Addressing a press conference here on the CAD situation and other issues, Mr. Chidambaram said: “…gold imports constituted a substantial chunk of the imports and is a huge drain on the Current Account…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. This matter is under Government’s consideration.”
Mr. Chidambaram noted that CAD — representing the difference between exports and imports after considering cash remittances and payment — had risen to $38.7 billion or 4.6 per cent of the GDP (gross domestic product) during the first half of the current fiscal. Of this, a major contribution was by way of gold imports, amounting to $20.25 billion.
Citing figures, the Finance Minister went on to point out that as against the marginal accretion of $0.4 billion to the country’s forex reserves during April-September, the increase would have been many times more only if gold imports had been half the actual level. “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,” he said
Mr. Chidambaram argued that the country “cannot afford to spend so much on importing gold. Nobody says gold within the country should not be used for whatever purpose. There is enough gold within the country. But import of gold is huge strain on the current account.”
During 2011-12, gold imports amounted to a foreign exchange spending of $56.2 billion and to curb the rising demand for the precious metal, the then Finance Minister, in his Budget for the current fiscal, had double the basic Customs duty on standard gold bars to 4 per cent from 2 per cent and on non-standard gold to 10 per cent. Even as certain other measures had to be moderated, the hike in duty did lead to some decline in imports.
Gold imports during the first six months of 2012-13 in value terms stood pegged at $20.2 billion, marking a decline of about 30.3 per cent over the like period a year ago. Thus, the decline can partly be attributed to increase in customs duty on gold imports by government in January and March, 2012.
However, Mr. Chidambaram did not buy the argument that increase in customs duty on gold did and could further lead to increased smuggling. “May be some smuggling has taken place but whatever level of duty, there is always smuggling.”
As for the major contributors to a widening CAD, Mr. Chidambaram said they were a decline in exports, which slipped by 7.4 per cent during the April-September this fiscal, coupled with a rise in imports by about 4.3 per cent during the six-month period.
However, the gap in export and import, he said, was partly made up “by an increase in services exports of 4.2 per cent and, consequently, surplus in services which amounted to $29.6 billion and remittances of $32.9 billion.”
What was particularly positive a worrying situation was that the widening CAD was financed without drawing on country's foreign exchange reserves, mainly because of adequate inflows of FDI ($12.8 billion) and FII ($1.7 billion). The net result is that “we have not drawn on the foreign exchange reserves and, in fact, there is a marginal accretion of $0.4 billion to the reserves,” he said.
“While the CAD is indeed worrying, I think it is within our capacity to finance the CAD, thanks to FDI, FII and ECB. I would like to once again underscore the crucial importance of FDI and FII. As I have said before, attracting foreign funds to India has become an economic imperative,” he said.
RBI committee wants steps to cut gold import
MUMBAI: There is a need to moderate gold import as the insatiable appetite for the yellow metal could jeopardise economic stability, a panel constituted by the RBI has said. Financial products designed to provide returns equivalent to that of the precious metal could divert investors from buying gold, it said.
"There is a need to moderate the demand for gold imports, as ensuring the external sector's stability is critical," said a draft report of the KUB Raoheaded working group set up by the RBI to study issues related to gold imports and gold loans by NBFCs.
"These products will, if designed properly, help to monetise a portion of the privately held stock of gold as well as financialise the incremental demand for gold," it said. Policymakers are rattled by the soaring gold demand, which has widened the current account deficit to a record 5.4% of the GDP. Investors have been chasing it as other investments , including equities and fixed deposit returns , turned adverse. Gold contributes to nearly 30% of the trade deficit .
"We may be left with no choice but to make it more expensive to import gold," said Finance Minister P Chidambaram. About 10% of the world's gold is in India's possession , says the World Gold Council .
Accumulated gold stock in India is around 18,000 to 19,000 tonnes as per independent estimates. During 2002-2012 , annual gold demand has remained relatively stable at about 700 to 900 tonnes. To divert people's attention from buying gold, the panel has suggested various financial savings products . "There is a need for banks to introduce new gold-backed financial products that may reduce or postpone the demand for gold imports," it said. "Awareness would play an important role in popularising these instruments."
Instruments like gold accumulation plan, goldinked account, modified gold deposit and gold pension could be considered for investment. The challenges for these products would be to offer higher returns and provide adequate liquidity. The committee suggested allowing exchange-traded funds to invest their gold holdings in gold certificates with banks and that the modalities could be worked out with the capital markets regulator.
The impact on gold imports, however, would depend on various factors, which could either lead to an increase in demand or a reduction in gold imports, the RBI said. Attempts to control consumption could lead to black-marketing .
"If there is an increase in import duty and gold-linked financial products come, black market for gold will start," said Gnanasekar Thiagarajan, director, Commtrendz Research. The RBI took a number of measures to discourage investment in the precious metal. It banned banks from funding gold buying by gold loan companies and reduced lending capacity of gold financing NBFCs. The committee said that the extant loan to value ratio should provide a reasonable risk cover in case gold prices fall by 10%.
"There is a need to moderate the demand for gold imports, as ensuring the external sector's stability is critical," said a draft report of the KUB Raoheaded working group set up by the RBI to study issues related to gold imports and gold loans by NBFCs.
"These products will, if designed properly, help to monetise a portion of the privately held stock of gold as well as financialise the incremental demand for gold," it said. Policymakers are rattled by the soaring gold demand, which has widened the current account deficit to a record 5.4% of the GDP. Investors have been chasing it as other investments , including equities and fixed deposit returns , turned adverse. Gold contributes to nearly 30% of the trade deficit .
"We may be left with no choice but to make it more expensive to import gold," said Finance Minister P Chidambaram. About 10% of the world's gold is in India's possession , says the World Gold Council .
Accumulated gold stock in India is around 18,000 to 19,000 tonnes as per independent estimates. During 2002-2012 , annual gold demand has remained relatively stable at about 700 to 900 tonnes. To divert people's attention from buying gold, the panel has suggested various financial savings products . "There is a need for banks to introduce new gold-backed financial products that may reduce or postpone the demand for gold imports," it said. "Awareness would play an important role in popularising these instruments."
Instruments like gold accumulation plan, goldinked account, modified gold deposit and gold pension could be considered for investment. The challenges for these products would be to offer higher returns and provide adequate liquidity. The committee suggested allowing exchange-traded funds to invest their gold holdings in gold certificates with banks and that the modalities could be worked out with the capital markets regulator.
The impact on gold imports, however, would depend on various factors, which could either lead to an increase in demand or a reduction in gold imports, the RBI said. Attempts to control consumption could lead to black-marketing .
"If there is an increase in import duty and gold-linked financial products come, black market for gold will start," said Gnanasekar Thiagarajan, director, Commtrendz Research. The RBI took a number of measures to discourage investment in the precious metal. It banned banks from funding gold buying by gold loan companies and reduced lending capacity of gold financing NBFCs. The committee said that the extant loan to value ratio should provide a reasonable risk cover in case gold prices fall by 10%.
Gold imports: FM wants to fix symptoms, not disease
The finance minister is on a gold-bashing trip once more, thanks to a deteriorating external front. He wants to raise taxes on gold imports, since gold is an important contributor to India’s import bill after oil.
At a news conference yesterday, P Chidambaram said: “I would 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. This matter is under the government’s consideration.”
The FM should ponder the consequences of his statement, for he is not only fighting a strong cultural preference for gold, but commonsense economics too.
Let’s say he raises taxes on gold imports. So what will happen then? Domestic gold prices will rise due to constrained supplies. And what will you do if domestic prices rise? Will you be more convinced about gold’s potential as an investment avenue or less? The chances are people will buy even more gold. Constricting gold imports is the surest way to make people cling more to the metal.
Some short-term import curbs may be warranted, but it emphasises that the real problem is lack of returns with normal financial instruments.Reuters
Another statement he made is interesting: “Suppose gold imports had been one half of the actual level (around $20 billion in April-September 2012), that would have meant that our foreign exchange reserves would have increased by $10.5 billion.”
Sure, when people import gold, they use the country’s exchange reserves to buy the metal. To that extent, the reserves will come down.
But something else has also happens. When people buy gold, they are effectively making official forex reserves private. Dollars become private gold. Ordinary people now own the reserves, not the government.
This has two implications. One, when I pay rupees to buy dollars to import gold, I reduce money supply in the economy. Two, I also save instead of spending my rupee. Put another way, buying gold is a form of private inflation combat. If the money had been spent on buying local things, like food on milk or eggs, it could have pushed up inflation.
There may also be another factor at work. The UPA’s theme song has been cash disbursements for welfare schemes. Since NREGA and other schemes have pushed wages up, what is the likelihood that some of the increased gold demand is coming from the poor in rural areas? Quite high? It means government spending on welfare may be one reason for the spike in gold demand, though not the only one.
Another thought: if direct cash transfers put more cash (rather than goods) in the hands of the poor, will they use it to buy gold? Or booze? Or essentials? Since the money will be given to the women of the households, what do you think will happen? Chidambaram should ponder this possibility too when pushing ahead with cash transfers. You never know what the poor will do with extra cash.
The effort to curb gold imports through higher import taxes may be a short-term fix for the current account deficit, but in the long run, the government has to find a cure for the disease (inflation), not the symptom (private gold purchases).
“I believe gold imports will come down when inflation settles down…people consider gold as a hedge against price rise,” said C Rangarajan, Chairman of the PM’s Economic Advisory Council (PMEAC), the other day.
In fact, this is exactly the same point made by the Reserve Bank of India’s Working Group on gold imports and gold loans headed by KUB Rao. Rao’s report, put in the public domain by the RBI yesterday, also indicated that some short-term import curbs may be warranted, but it emphasises that the real problem is lack of returns with normal financial instruments.
Said the report: “It is necessary to introduce savings schemes and instruments that can provide real returns. The dominant reason why a person may like to hold his savings in the form of gold is to secure a hedge against inflation. Therefore, offering a real rate of return, considering the high inflation rate prevailing, as an incentive on a financial instrument would better address the issue of excessive clamour for gold imports. Therefore, products analogous to inflation-indexed bonds may be considered as alternatives.”
So, Mr C, fix inflation and the problem of gold imports will melt away. Or offer better returns through inflation-indexed bonds, but we haven’t heard anything on that yet. What we have heard you saying is that interest rates must come down.
Say that softly, Mr C. If India’s gold bugs hear you talking about lower rates, they will buy even more gold.
No comments:
Post a Comment