Golden opportunity

The recent slide in global crude oil and gold prices offers India a reprieve on the current account deficit (CAD), presenting an opportune time for policymakers to ease up on the numerous gold import restrictions. The circumstances which contributed to the unprecedented surge in gold imports in 2011/2012 and resulted in a runaway CAD, have since dramatically changed. This may be the right time to do away with the 80:20 rule imposed last year, requiring gold importers to compulsorily export a fifth of each consignment. Apart from limiting raw material supplies to the jewellery trade, the rule has created needless hassles for banks tasked with enforcing it.

Worries that relaxing gold import restrictions today will lead to an unmanageable spike in the import bill are overdone on three counts. For one, the investment demand for gold from Indians (in the form of bars, coins and exchange traded funds) which fuelled the import surge in 2011-12, is rapidly fading. Unlike jewellery buyers, who stock up on bullion when its prices fall, investors tend to accumulate gold when prices move up. Given that gold has suffered a 12 per cent loss in rupee terms in the last one year while equities have appreciated by 36 per cent, gold has been rapidly losing its investment allure. Data from the World Gold Council shows that investment-related purchases of gold, which amounted to over 430 tonnes and made up 40 per cent of India’s bullion imports a year ago, have more than halved to 200 tonnes in the last 12 months. Two, spiralling inflation in recent times was a key trigger for savers to flock to physical assets such as gold. But with consumer price inflation numbers moderating steadily to sub-8 per cent in recent months, they may no longer to be tempted to so aggressively hedge against inflation risks. Yes, with domestic gold prices now hovering at ₹2600 a gram and consumer sentiment improving with the economy, jewellery demand looks likely to pick up from the depressed levels of the past two years, starting with the upcoming festive season. But a quick computation suggests that even if jewellery offtake were to bounce back to the levels prevailing before the import curbs, the gold import bill is still unlikely to exceed $30-35 billion this year, given the sharp decline in global gold prices and muted investment demand. This will still be way below the $56.5 billion bullion import bill that India ran up in 2011-12.

There can be quite a few positive spinoffs from relaxing the 80:20 rule. Allowing unhindered access to its raw material can fuel festive season purchases and help revive the ₹2.5 lakh crore gems and jewellery trade. This can create a positive spillover effect on its 25 lakh workers. The resulting customs duty collections (there is no need to relax them yet) will provide a much-needed boost to Central tax revenues. With savers getting increasingly disenchanted with gold, this is also the ideal time for the Government to double up its efforts to bring the idle gold, estimated at 25,000 tonnes, lying with Indian households, back into circulation through gold deposit schemes.

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