By Tarunkumar Singhal, Raman Jokhakar, Chartered Accountants
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The import of two items contributes disproportionately to India’s record trade gap and current account deficit. One of these, namely energy imports, is unavoidable. The strong demand for the other item – gold – is driven by several factors and may perhaps be reduced. India imports up to a quarter of annual global production, and gold imports equal 75 per cent of the current account deficit. Gold has always been a traditional repository of savings, and households contribute 80 per cent of demand. An estimated 25,000 tonnes of bullion is held by Indian households. While that is an impressive stock of wealth, it is unproductive and earns no interest. It has, however, been an excellent hedge against inflation. In the last three years, high inflation and slow GDP growth have made alternative assets like equity and debt unattractive. At the same time, gold has gained against hard currencies, as debt-to-GDP ratios have hit worrying levels across the euro zone and the US.
The asset mis-allocation arising from a focus on gold is unlikely to change until there’s an economic rebound. The policy priority now should be to reduce imports, without depriving investors of possible upsides from holding the metal. The gems and jewellery industry has suggested ways in which domestic institutions could release some holdings for exports via, say, “working capital” loans of gold. A scheme where individual Indians can sell gold for hard currency may help reverse the one-way flow, but this is probably too radical for the mandarins to consider. Creative financial engineering could perhaps find other ways to unlock that store of 25,000 tonnes. RBI Deputy Governor Subir Gokarn recently suggested offering gold-backed bonds or reverse mortgage schemes on household holdings of the metal. Previous experiments with such schemes have not been successful. This was partly due to rigidity in income-tax treatment and also because jewellery had to be melted down. Any new scheme would have to be structured to circumvent such known issues — but, given the trend, the sooner such
ideas are implemented, the better.
