Monday, October 21, 2013




1.   Lower official import of gold does not mean less import.
2.    Why are we projecting sovereign insolvency?
3.    Why are we denying that our CAD will be 5%++
4.    Why convert clean trade into shadow business?
5.    Why not push exports?
6.    Why we don’t regulate non essential defense imports?
For 22 years India has been freely importing gold.  Before that huge quantities sneaked in the country through smuggling. In 1991 import of gold was officially authorized. Banks and public sector institutions welcomed these non-recognized importers as bullion dealers of creditable credentials.  Now the same bullion dealers, with reversal of policy, again become suspect in the eyes of the officialdom who believe that investment in yellow metal is unproductive and perhaps anti-national. Unfortunately bullion import is now wrongly targeted as non-remunerative investment while poor performance of the economy is attributed to lack of governance at the highest level.
If a person claims that he has the capability to buy gold and actually buys, he is automatically considered to be a worthy and solvent than the one who might mention that once upon a time he was in a position to buy the metal but has no financial capability to do so now. Likewise Indian Government is openly propagating its insufficiency or lack of means.   
After April 2013, Indian government hiked import duty to 10%. Additional requirement enforced with oversight of “investigating agencies” is that 20% metal out of any single import window has to be compulsorily exported before further quantity can be officially brought in. These controls are apparently introduced to contain current account deficit (CAD) which was trending 5% of GDP.  Ideally current account deficit needs to be maintained below 3%.
With above restrictions, Government claims that the CAD would be 3.7% or around $70 Billion. At current value of about US$ 1350.00 per troy oz., Indian imports of 800 tons in a single year value $ 34 Billion -- about 1.9% of Indian GDP. Had imports been, as usual, duty free business,   CAD would have been (3.7+1.9) =5.6% which the Finance Ministry can ill-afford to project. 
Indian demand of gold is inelastic. High or low price is immaterial to the demand/consumption of commodity.  About 700-800 tons of gold --whether priced 2000 $ per troy oz or $1000 per troy oz will land into the country somehow. Since duty of 10% permits an arbitrage through grey channels, more imports will be unofficial than official.
Administrative steps may appear to be logical but curbing imports has initiated large cale smuggling of gold. Therefore national wealth is not accounted precisely in country’s balance sheet by the Government itself despite being fully aware of the shadow trade. Part of NRI remittances could fund gold imports through unreported transactions. To that extent official remittance will also decline.
Finance Ministry can claim reduction in CAD to 3.7% on paper as of now, but it would be higher depending upon the unofficial imports and diversion of remittances.  Therefore the projection of 3.7% as the CAD is a window dressing rather than a rational picture.  Rating agencies will surely not ignore this adjustment by Government in its Balance Sheet.
Another paradox is that India was allowing duty free import of gold even when the prices touched $2000.00 per troy.oz but have restricted its imports when prices are 35-40% lower.  Are we a unique country which always imports commodities expensively and debar them when they are available cheaper?   
There is a dichotomy of interest between the Government and the Nation.  The agenda of the Government is inconsistent with general aspirations of the people. Unofficial gold will continue to be transacted both in rural and urban space as has been the practice of Indian society despite these inconvenience.  Those who propagate that gold is a poor investment may be in error when most of world’s Central banks including RBI continue to access and hold Gold as a valuable asset for contingencies and better long term return 
Secondly, is it a national agenda to convert white economy of $34 billion into a grey economy wholly or partially? That can be inferred from decline in FY Q1 import of $16.5 billion to $3.5 billion in FYQ2 (about 80%) which means that a substantive import of metal has gone to unreported inflows while increase in exports is only marginal. (see charts below). Therefore exuberance in reduction of CAD is flawed because in the real sense money has no color.  

To reduce CAD emphasis is lacking on pushing export and tackling fiscal deficit. Food Security subsidies which were inappropriate at this point of time should not have been introduced. Pragmatic sugarcane pricing by the States of UP/ Maharashtra and wheat values from FCI are bottlenecks in exports. Iron ore export stays in limbo. Cotton exports are unreasonably regulated. We could have leveraged other Indian exports by allowing market premium on FX earnings for facilitating gold imports. That way, Gold import could have been made 30-40% FX neutral.  Also some of the non-essential defense imports can also be pruned. Diesel/petrol subsidies need to be cut.
In totality the Government has not acted prudently but has taken the easy way out of singling out gold import as the menace to CAD.  There is a definite need to review the gag on gold imports. 


No comments:

Post a Comment