Encouraged by the government’s intention to categorise gold as a holding asset not to bring in circulation, the premier industry body Assocham has urged the government to encourage formal financial instruments to make the investment more productive. A senior government official had recently said that gold is a holding asset which increases massive strain on investible resources.
Terming the current gold import as huge burden on the balance of payments, Assocham’s secretary general D S Rawat said.
India’s appetite of gold accentuates the current account deficit and hence, import of the yellow metal is unsustainable.
The total import value of gold during last financial year was higher than the gross state domestic product of 12 states and budgeted estimated expenditure on fertiliser and food subsidy. India’s gold import was estimated to have surpassed 1,000 tonnes in 2011 from the level of 958 tonnes in the previous year.
Post offices – especially in rural areas – should be used to sell such government guaranteed instruments to extend their reach throughout the country. Being the largest importer of gold in the world, India accounts for nearly one-third of the annual demand with import bill rising from $4.1 billion in 2001-02 to $33.8 billion in 2010-11.
On the other hand, it represents a massive strain on investable resources and weaning away domestic savings from gold assume importance, Assocham said in a study titled ‘India’s Gold Rush – Its Impact and Sustainability.’
Equally astounding is the fact that India imported more gold than the annual budgeted estimated expenditure outlay on water supply urban development and sanitation. India’s gold demand is ironically 37.6% more than China’s although China’s GDP is 3.5 times of India’s GDP. Compared with the United States which has a $14 trillion economy – ten times the size of Indian economy – India’s gold demand is almost five times.
Gold as a commodity does not add much to the productive capacity of an economy. Moreover, foreign exchange reserves used to import gold can be used to get other commodities. According to the Reserve Bank of India’s review of macro-economic situation, the current account deficit is a cause of concern because of inelastic gold and oil demand.
With the government increasing import and excise duties on gold and silver, both commodities are set to cost more. The new rates on ad valorem basis – 2% on 10 grams of gold and 6% on one kg of silver – mean that importers will have to pay double the duty.
Calculated on the basis of compound annual growth rate of period 2010-11 over 1999-2000, the gold import bill could total 100 billion dollars by 2015-16. India has one of the highest savings rate in the world to the tune of 30% but lags behind major economies in terms of key economic indicators.
Efforts must be made to introduce more financial saving instruments and extensive education campaigns should be undertaken – particularly in rural areas – to minimise propensity towards gold, Rawat added.
The government recently doubled import duty on precious metals and stones to make the products made of them costlier and thereby, encourage investment in other instruments including post office certificates.