Indians Fascination for Gold Widens Trade Deficit
The fascination for gold by Indians is from time immemorial. Gold is an integral part of many important social customs and functions like marriages.births or gifting. Possession of gold is also seen as a hedge against inflation and is also a way of converting liquid cash into an fixed asset. Gold is also used to pass on family wealth through generations. These days gold is also attracting the smart speculator who first buys and later on sells for a profit.
All this has created a rising demand for the yellow metal and in view of negligible local production it is imported at a huge foreign exchange outgo. Nearly one third of India's total import bill is accounted for by gold imports alone. In the financial year 1999, India imported 486 tonnes of gold. It has since risen to around 1079 tonnes in fiscal 2012. The global supply in 1999 was 4206 tonnes and in 2012 was 4130 tonnes. Thus the share of Indian imports went up from 11.55 % in 1999 to 26.12 % in 2012. On a year on year basis in 2012, against a demand growth rate of of 2.5% in global gold supply the growth rate of demand from India was 10.7%.
In 1999, India imported gold worth Rs 17,991 crores which has risen in 2012 to Rs 2,69,563 crores a 15 fold increase in 13 years. On an average it is estimated that gold prices since 2000 have increased at an average of 16.3% per year and are today hovering around Rs 30,000 per 10 grams.The ratio of gold imports to our GDP is around 3%. The gold imports are price inelastic.
Who are the major buyers of gold in India. The rural people especially the farmers are major buyers of gold for the obvious reasons of holding to a solid form of wealth and also hedging against inflation. Also due to cultural and social reasons gold is purchased during marriage season to be given as part of dowry to the bride.The economic progress made in the last few years has also resulted in overall increase in the purchasing power with a large cross section of Indian society and this has given rise to a growing demand for gold for investment purposes. The higher rate of return given by gold in comparison to alternate forms of investment is also a strong reason fuelling the rising demand for gold.The quantum of black money is also an important factor in determining gold demand. Industrial use of gold also is on the rise though in a very nominal manner.
The annually increasing quantum of gold imports is creating a big problem in India's Current Account Deficit(CAD) and is helping to widen it. As is well known our Import bill is always more than our exports earnings. This thus results in a state of Deficit and causes the rupee to weaken against the dollar. This results in imports becoming costlier and also increasing the deficit figure. With gold imports being $34.4 billion in 2010-11 and $49.2 bn in 2011-12, India's Trade Deficit as a percentage of GDP is touching a high of 8-10% as against a sustainable 2-3%. This is a serious cause of concern.
After the unavoidable oil import gold is the second largest imported item in India. The former gets converted into value added products. However gold gets frozen as a dead and unproductive asset luying mostly in bank lockers. This drains a significant portion of our economy and vital foreign exchange from our finanial system every year.The export earnings are not in a position to finance the imports and leave a surplus. The increasing imports of gold are negatively impacting our external trade and tarde deficit in particular. The economists and government are worried at this high consumption of gold by Indians every year.
What is the way out? rduce Due to prevailing social, cultural and economic reasons the possibility of Indians reducing their gold consumption are very bleak. The government has to therefore come up with novel ways in which while reducing the gold imports the demand is also met. One of the ways could be encouraging the recycling of gold held by institutions like temples who are holding huge quantities of gold. Also the introduction of gold bonds indexed/linked with inflation/price can also avoid holding of gold in physical form and still satisfy the speculative urge of interested people. Social reforms can also be initiated where instead of gold other forms of assets are given in marriages which bring in earnings every year.
Can the Indians change their outlook on gold and help reduce its imports and stabilize the CAD to manageable levels. It is time Indians redefined their love and fascination for gold to more realistic levels. Not going to be easy but worth trying.
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