Now, for the long-term fixes

The Centre’s decision to do away with the 80:20 rule for gold imports, which mandated traders to export 20 per cent of all the gold they imported, is welcome, particularly for the surprise element. The relaxation, which has come at a time when the markets were expecting the imposition of tighter curbs, has caught hoarders and speculators on the back foot. By making gold freely importable once again, it checks smuggling, discourages hoarding and makes jewellery purchases more affordable to retail buyers by trimming down the domestic premium on gold prices. Easier availability of gold is also likely to give a fillip to the ₹2.5 lakh crore gems and jewellery business and revive employment prospects for the 25 lakh workers associated with the trade. With the 10 per cent customs duty being retained, higher gold imports through official channels will also provide a much needed boost to the Centre’s tax kitty.

Coming as it has at this juncture, the impact on India’s import bill and on the current account deficit (CAD) is likely to be muted. With Deepavali over, gold demand is likely to see a seasonal tapering over the next few months. Even if jewellery sales rise in comparison with last year due to greater affordability and the absence of supply constraints, the import bill is likely to be contained by the recent plunge in bullion prices to a five-year low (local prices are now 12 per cent below last year’s levels). For now, any residual impact of higher gold imports on the CAD will be absorbed by the substantial savings on crude oil. In fact, it was due to this that India’s trade deficit for April-October 2014 has remained 4 per cent below last year’s levels. But having said this, policymakers cannot afford to relax their vigilance on the CAD. With exports hardly growing, the trade balance can turn adverse very quickly if crude oil prices spike up again. There is also no guarantee that the record FII flows which have flooded into India this year won’t rush out if the US embarks on interest rate hikes.

Therefore, the Centre should use the window of opportunity provided by the macro tailwinds to find long-term solutions to the problem of rising gold imports. Making PAN cards compulsory for bullion purchases (in jewellery or coin form) above a certain monetary value (say ₹1 lakh) will temper gold demand and prevent its widespread use for money laundering. Reviving the erstwhile gold deposit scheme offered by banks and making its features more investor-friendly may help monetise the vast hoard of household gold, estimated at about 20,000 tonnes. The Centre must also seriously examine the feasibility of launching gold-based investment products such as Gold Accumulation Plans, as suggested by the KUB Rao Committee in its 2013 report.

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