Move to check direct investment and cut current account deficit

The Government is planning a number of schemes aimed at unlocking some of the huge domestic savings currently held in gold. The measures are also aimed at redirecting demand from the yellow metal to gold-backed financial products. The Government is looking to introduce a new class of investment instruments intended to curb the rising trade and current account deficits, fuelled by rising gold imports.

“New gold-backed financial instruments in the form of modified gold deposits and gold accumulation plans, besides gold-linked account and pension products linked with the precious metal, are some of the measures being considered to reduce direct investment in bullion and jewellery in the domestic market and check the substantial rise in imports,” the Government said in its Mid-Year Economic Analysis for 2012-13 tabled in Parliament on Monday.

It believes that gold-backed products will allow investors to gain the benefits of investments in the high-yielding commodity without actually investing in the physical commodity. However, these instruments would have to be hedged through direct purchase of gold in the physical or derivatives market. It also needs to be seen whether they would help in curtailing gold demand, it added.

The report also states that the demand for financial investments in assets that retain their real value needs to be addressed.

“The ideal solution to this problem would be to bring down inflation so that households see good returns from traditional financial instruments,” it said.

High imports

India is one of the biggest consumers of gold in the world and this is met mainly by imports. Even after a decline of over 30 per cent, gold worth $20 billion was imported during the first six months (April-September) of the current fiscal. Imports might have come down due to increases in Customs duty in January and March this year.

The report said that import of gold is one of the major factors responsible for the “deterioration” of the current account deficit (CAD). In the financial year 2011-12, gold imports rose by 39 per cent and accounted for about 80 per cent of CAD of 4.2 per cent. This deficit is expected to be around 3.7 per cent during 2012-13.

The Reserve Bank of India has been taking steps on lending against gold. It has tightened norms for non-banking finance companies lending against gold. It has also asked banks to lower their debt exposure to gold loan companies and barred them for financing purchase of gold in any form other than working capital finance.

(This article was published on December 17, 2012)
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