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Sharp decline in gold prices will have a favourable impact on the economy especially the high Current Account Deficit (CAD) and the overall Balance of Payment (BoP) position, Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan has said.
“It (decline in gold and crude oil prices) will have a favourable impact on BoP because India is a big importer of gold and crude oil,” Rangarajan told PTI.
Gold prices fell to a 21-month low of Rs 26,440 per 10 grams in the domestic markets on April 16 due to continued sell-off in the global markets.
Though there have been some recovery in gold prices in the spot as well as futures market, uncertainty looms large over the way prices would move going forward.
Gold prices had touched an all-time high of Rs 32,975 per ten gm on November 27, 2012.
Rangarajan said: “Substantial reduction in prices of gold can bring about significant benefits to the balance of payment.”
Gold and crude account for about 40-45 per cent of the country’s total imports.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the declining prices will “certainly make our macro-economic balancing exercise easier...Now people will not rush into gold as an investment asset. They will look for other more productive assets. I think that would be good for the economy.”
India’s CAD, which is the difference between inflow and outflow of foreign exchange, widened to a historic high of 6.7 per cent of the Gross Domestic Product (GDP) for the quarter ended December 2012.
Softening of crude oil and gold prices will help in improving the CAD. Brent crude oil futures have seen a 10 per cent price slide this month.
“While all efforts have been made to reduce the attractiveness of gold as an asset, there is still a large import of gold into the country”, Rangarajan said.
However, some experts fear that declining prices may give rise to heightened demand for gold.
Declining prices, according to NCAER economist Rajesh Shukla, might spur the demand for gold rather than curbing it.
“I think domestic demand for gold is certainly going to increase. It might again become important avenue for investment for the people. Prices are crashing due to crash gold of prices in international markets not due to less demand in domestic markets,” he argued.
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