There is arguably no single item that has wrecked the country’s balance of payments more in recent times than gold. Since the global economic crisis of 2008-09, India’s gold imports have zoomed from under $21 billion to over $56 billion in 2011-12, accounting for over 70 per cent of its current account deficit increase during this period. No wonder, it has prompted the Government and the Reserve Bank of India (RBI) to resorted to a slew of desperate measures to “moderate the demand” for the yellow metal. These include hiking the gold import duty and directing non-banking financial companies (NBFC) not to extend loans beyond 60 per cent of the value of jewellery offered as collateral, to reduce its attractiveness as a liquid source for securing credit. An RBI Working Group has now recommended imposing export obligations on bulk importers, besides additional curbs on gold loan NBFCs. That includes a “thorough review” of their current operational practices and raising of resources through banks or instruments such as non-convertible debentures.

All these, however, only partly address the real underlying reasons for surging gold imports. Between 2009-10 and 2011-12, financial savings of households have fallen from Rs 786,350 crore to Rs 694,920 crore. This absolute decline, alongside growth of savings in gold and real estate, is largely a reflection of the public’s disenchantment with investing their money in bank/post office deposits, equities or mutual funds. In the past five years, gold prices have risen annually by over 25 per cent, outpacing not just the corresponding wholesale inflation of 7 per cent, but the average returns from every conceivable financial asset. In gold, an additional factor that has worked is growing purchases by China and central banks worldwide since 2009 — reflective, in turn, of their disenchantment with holding reserves in dollars or euros in the post-crisis period. These have further boosted gold’s credentials as a long-run inflation hedge, contributing to more demand, higher prices and increased imports, each reinforcing the other.

Given that gold imports have fallen physically by nearly a third so far this fiscal — and its prices are also now some $275 below the record $1,920-an-ounce level of September 2011 — the bull-run may be over. But with Indians’ deep-rooted craving for gold, you never know for how long. In any case, controls of the sort already imposed or proposed will not “moderate the demand” beyond a point. A better solution would, instead, be to arrest the underlying problem of de-financialisation of savings. To start with, why treat interest on bank deposits as income to be taxed at the normal (often highest) marginal rates? Why not eliminate it totally, so that the public has reasons, other than safety and guaranteed returns, to entrust its savings with banks? This proposal has merit, when viewed against the fact that bulk of gold transactions today are in cash and go completely untaxed.

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