India’s golden deficit

A sharp surge in gold imports has widened the trade deficit but may have prompted a flurry of purchases. Gaurav Choudhury writes.

business Updated: May 14, 2013 21:44 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times

What is significant about India’s latest trade data?
India’s exports, battered by drying shipment orders for the most part of the last one year, grew by 1.6 % in April recording the fourth successive monthly growth, but sharp jump in gold imports widened the trade deficit.

What was the trade deficit in April?
After narrowing to a two-year low, India’s trade deficit worsened to $17.8 billion in April from $10.3 billion in March. Exports rose by 1.6% in April, down from 7.0% in March, while imports rose by 10.9% following a 2.9% contraction in March. Imports grew by nearly 11% in April to $41.95 billion on a year-on-year basis, the fastest pace in a year largely contributed by significant increase in gold imports. Gold and silver imports during April grew 138% to $7.5 billion compared to $3.1 billion in the same month of the previous year. Exports during the month stood at $24.16 billion as against $23.7 billion in the same month last year.

Why has gold imports jumped?
Gold imports have risen sharply as consumer demand for gold shot up significantly. Consumers likely brought forward their purchases in response to the recent sharp fall in gold prices. As a result, higher gold import volumes offset the price effect. According to analysts, another key reason for the spiral in demand of gold has been inflationary expectations. With inflation seeing a reasonable correction, we expect the real rate of return on financial products to rise, enabling households to make asset allocations in favour of financial products.

Will the demand for gold moderate?
Analysts believe that the demand for gold is likely to moderate because the Reserve Bank of India (RBI) has proposed to restrict the import of gold on a consignment basis by banks solely to meet the genuine needs of exporters of gold jewellery and restrict the facility of advances against the security of gold coins per customer to gold coins weighing up to 50 grams. What also seems to adversely impact demand is a pick-up in the pace of daily price fluctuations or volatility. Consumers are wary about purchasing when the price is volatile for fear that they buy and then find the price falls.

What does balance of payments mean for an economy?
An economy, like an organisation or a company, has a receipts and expenditure account. The balance of payments (BoP) is a statement of account of the income and expenditure made through foreign exchange. A country’s BoP statement is divided under two major heads — the current account and capital account. The current account gives a measure of the difference between dollar inflows and dollar outflows.

What does a deficit or a surplus in the current account signify?
A current account deficit (CAD) means that there is more outflow of capital from the economy than inflow, which is not desirable.

What’s wrong with India’s CAD?
Economists have attributed India’s widening CAD to rising gold imports among other causes. The CAD has widened to a record 6.7% of GDP during October to December — a worrying sign for a slowing economy where fulfilling immediate dollar payment obligations may necessitate dipping into the pool of foreign exchange reserves.

Will a fall in gold imports not hurt jewellery trade?
The government has also proposed changes in gold exchange traded fund (ETF) that mutual funds offer to enable linking these to banks’ gold deposit schemes. The objective is to unlock a part of the gold physically held by mutual funds under gold ETFs and enable them to deposit the gold with banks under the gold deposit scheme. The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewellery trade.

Why do people invest in gold?
Gold is one of the several assets that people invest in. Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite for parking surplus income. With inflation remaining high and volatile stock markets, gold prices have hit an all-time high. It has risen 35% over the last one year as investors in Europe and the US flocked to add more glitter to their investment portfolio rather than park funds in unstable and risky equity markets.

How big is the Indian jewellery market?
India is the world’s largest market for gold jewellery, accounting for most of the nearly 1,000 tonnes of gold imports in 2012.

What drives the demand for gold in India?
More than 50% of gold jewellery is bought for weddings. The festival of Dhanteras, the most auspicious day in the calendar just before Diwali, has traditionally created a strong seasonal surge in sales. Demand also surge during the Akshaya Tritiya festival in May. The motivation for a jewellery purchase can be inextricably linked to value, wealth preservation and growth rather than pure adornment – thus, there is little distinction between investment and jewellery demand. 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 purchasing will drive approximately 500 tonnes a year. A further 500 tonnes of existing gold will be gifted by one family to another.

First Published: May 14, 2013 20:59 IST