Not quite the Midas touch
The importance of gold in domestic macro-economic management is best captured by the flurry of moves to curb Indians’ virtually insatiable desire to buy and stock up the yellow metal.india Updated: Jul 24, 2013 07:12 IST
The importance of gold in domestic macro-economic management is best captured by the flurry of moves to curb Indians’ virtually insatiable desire to buy and stock up the yellow metal.
India’s gold imports — about 970 tonnes for some $60 billion (around Rs 3.6 lakh-crore) in 2012 — is next only to crude oil. The two commodities were responsible for pushing India’s current account deficit (CAD) — the difference between dollar inflows and outflows — to a historic high of 4.8% of GDP in 2012-13. The widening CAD and its non-disruptive financing have emerged as major challenges from the perspective of macroeconomic stability.
‘Non-disruptive’ financing broadly implies the extent to which the Reserve Bank of India (RBI) can help finance the CAD without dipping into the pool of foreign exchange reserves, which currently stands at $285 billion, just enough to cover seven months of imports. Gold has long been a tested hedge against inflation and any period of steep climb in its buying volumes generally coincides with a phase of high overall prices.
Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite for parking surplus income as it has long been considered a safe haven asset. India is the world’s largest market for gold jewellery, accounting for most of the nearly 1,000 tonnes of gold imports in 2012.
Gold is integral to all Indian wedding ceremonies: purchases relating to Indian weddings typically account for 50% of annual jewellery demand. With 50% of the Indian population under 25 and approximately 150 million weddings anticipated over the next decade, the World Gold Council estimates that wedding-related purchases will drive approximately 500 tonnes a year.
A further 500 tonnes of existing gold will be gifted by one family to another. Unlike developed economies, jewellery purchase in India is not driven by the desire for pure embellishment, implying ornaments are purchased as much for investment as for adornment.
The RBI's latest move making it mandatory to export a fifth of all imported gold in the form of ornaments is aimed at reducing jewellery demand. The end-objective is to contain the copious outflow of dollars by reducing India's gold import bill. Stemming foreign capital outflows has become critical for India, as the rupee has lost almost 15% since May plunging to a record 61.21 earlier this month.
A weaker rupee can fan inflation by making imported goods such as crude oil costlier, resulting in higher fuel prices. Curbing gold consumption, besides helping prop up the rupee, also has an important secondary benefit. India is in dire need of resources to fund its infrastructure needs to build highways, ports, airports and railways. Instead of locking up funds in gold, thrifty Indians can help bridge the cash deficit by opting to park their surplus money in productive instruments that are well-regulated, give healthy returns and, importantly, widens financial inclusion.