India needs to bring down its gold demand from about 1,000 tonnes a year to 700 tonnes which prevailed only a few years ago, a top policymaker has said.
This is necessary as increased gold imports is adversely impacting the current account deficit (CAD), C. Rangarajan, Chairman to the Prime Minister’s Economic Advisory Council, said.
The demand for gold can be reduced by taming inflation and enhancing the real rate of return on financial products, Rangarajan said in his inaugural address at the 6th International Gold Summit, organised by Assocham here on Wednesday.
In the last two fiscal years – 2011-12 and 2012-13 – the country’s gold imports in quantitative terms stood at 1,079 tonnes and 1,017 tonnes respectively.
In value terms, it was about $56 billion in 2011-12 and $54 billion in 2012-13.
Stating that the spurt in gold imports in April has raised a serious concern, Rangarajan said the sharp increase could partly be due to people taking advantage of the sudden fall in the price of gold.
“While efforts must be made to reduce the basic attraction of gold to the people in India, at least, in the short run, we can start acting to reduce the demand for gold as an asset.”
Rangarajan suggested a three-pronged strategy to contain and reduce the demand for gold and imports.
These are taming inflation, fiscal and administrative actions and improving the institutional mechanisms for domestic trading in gold. There is an asymmetry in the ease with which gold can be bought and sold within the country, he pointed out.
Inflation indexed bonds that are being contemplated can also be a strong substitute for gold, Rangarajan said.
In addition to quantitative reduction, if the current trend in world gold price continues, the CAD will be significant, he said.
Rangarajan also said that gold prices are unlikely to go up or go down in the coming months.
In 2011-12, gold imports accounted for 72 per cent of the current account deficit. In 2012-13, it was 57 per cent.
India’s current account deficit is estimated at 5.1 per cent of gross domestic product in 2012-13.
Despite the surge in gold imports in April, the overall CAD is expected to be at least 0.4-0.5 percentage point lower this fiscal, he later told reporters.
Rangarajan also endorsed the Government and RBI’s recent moves to stem the import of gold.