Shivaji Sarkar
As the Indian economy goes downhill, the Reserve Bank of India (RBI) echoing popular sentiment wants to rein in gold imports. The apex bank and the Government are in sync. Both feel gold import is the only way to check forex outflow and current account deficit (CAD). Additionally, the RBI wants the Government to set up a gold bank – Bullion Corporation of India. This is absolutely bizarre. All imports are now channeled through the public sector banks and setting up another entity will undoubtedly make operations more expensive.
The concern over gold is likely to grow further as the Central Statistical Organisation (CSO) slashes growth forecast to 5 per cent from the latest assessment of RBI at 5.5 per cent. A myth is being created that India is importing more gold, but this is only partly true.
Gold is becoming more expensive as the rupee falls and the Government has imposed an import duty which has been raised from zero per cent in 1998 to six per cent now. It claims that it has stemmed the import from $ 56 billion tonnes last year to $ 38 billion this fiscal.
Unfortunately, in all these statements a critical aspect is being ignored. About 32 per cent of gold i.e. $ 19 billion is re-exported as jewellery. According to an estimate of the World Gold Council, the Government earned around Rs 2,836.6 crore in 2010 as an import duty on gold. This is miniscule considering the difficulties it puts the jewellery makers into as exports become expensive.
The big question is: Can less import of gold really check the growing current account deficit now threatening to touch 5.4 per cent? Officially it can. But a slowing economy and low returns on investment also look for other avenues. Gold has certainly become an investment tool. It is also not true as often said that it is an “unproductive” investment. Even gold on the shelf earns higher returns than money put in banks. This is the price a slowing economy pays. And, those having money in a rather impoverished society cannot risk losing it.
So steps to check gold imports are proving counter-productive. According to intelligence agencies, gold seizures at airports have risen almost 10-fold in recent months with the increase in its import duty hailed as one of the main culprits. There is some slump in imports through official routes. But traders say it is being met through smuggling, spawning a revival in the trade.
Finance Ministry data shows that between April and June 2012, customs authorities have seized 200 cases of smuggled gold worth $169 million (Rs 9.4 billion), up 272 per cent as compared to $46 million (Rs 2.4 billion) in the previous year from 20 registered cases. Recall that gold smuggling was a thriving business in the country in 1980s and 90s, during the Gold Control Act, but it reduced drastically after economic liberalisation.
India is one of the big consumers of gold at approximately 900 tonnes a year. But it is nowhere in the list of the largest consumers. It is not among the top 25 gold importing countries. The US remains at the top with $1150 billion purchases and Brazil at the bottom with $58 billion. Even with the supposedly high consumption, Indian purchases were worth $56 billion a year ago and since then it has been coming down.
Even China, which is also showing sluggish development trends, purchased $269 billion worth gold. It is the sixth largest buyer after Japan, which spent $292 billion. Even not so rich Egypt bought $164 billion worth gold– almost triple that of India.
Why is then India so worried or making an issue of gold? It’s an obvious indication of a mismatch in the Indian growth story. And if gold purchases are to be shunned, why should the RBI propose to establish a gold bank? The nation it seems is flogging the wrong horse. Government agencies need not enter yet another business. It is always an expensive proposition and only helps the bureaucrats enter a domain, which is not theirs.
The gold market is well-developed and any Government intervention is likely to convolute that. Already imports are officially channelled. Any further inroads into that area would cause difficulties to the free market structure. Curbs too would not work. Instead these would give a boost to smuggling.
Sadly, a myth is being created that gold is the bane of the Indian society. It is not. The entire world is investing in gold during these turbulent times. Even the RBI has increased its reserves to 557 tonnes from a virtual empty coffer in 1990. All other countries are increasing their gold reserves. The US has 8133 tonnes, Germany 3391 tonnes, France and Italy over 2400 tonnes, China 1054 tonnes, Switzerland 1040 tonnes, Russia 935 tonnes, Japan 765 tonnes and Netherlands 612 tonnes.
The problem is not with gold. It is with the functioning of the Indian economy. It is facing a problem of low private demand as high inflation hits every activity including Government business. It remains at 59.6 per cent of GDP at current prices against 59.2 per cent last year implying people are putting off planned purchases. Data from 47 banks, according to CSO, accounting for about 95 per cent of all loans show that “non-food credit”, which includes retail loans for housing and cars grew at a slower rate of 8.6 per cent in April-December 2012 against 10.4 per cent last year.
Manufacturing is growing at a slow pace of 1.9 per cent and even services sector growth has stymied to 6.3 per cent against 7.4 per cent. Additionally, it is estimated that a Government servant has lost almost 30 per cent of his income to inflation during the past three years. It means his purchases have suffered to that extent. Further, rising unemployment is reducing the demand.
Though tax revenue earnings are increasing, Government expenses on its administrative and even the tax set up grew much more. Gross direct tax collections during April-January 2012-13 has increased to Rs. 4,55,125 crore as against Rs. 4,25,274 crore during the corresponding period of last year with a growth of around 7.02 per cent. But most of it is lost on increased cost of administrative expenses. Project costs have multiplied owing to inflation adding to the further slowdown.
Gold is certainly not the culprit. It is the failure of governance on all fronts that has caused this slowdown. Too much of preoccupation with gold would not boost the Indian economy. It requires a neo-reform approach in terms of easing of taxes, rules and reduced presence of bureaucracy. The problem is in the lack of vision and ability to assess the situation. If this is tackled there would be the much-required turnover and the money being invested in gold would find the right channels. If there is a will there is a way. INFA
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