Govt mulls gold-linked schemes to contain CAD
Mid-Year Analysis says gold imports have been one of the major factors in deterioration of CAD which touched $78.2 bn or 4.2% of the GDP
The government is considering schemes such as gold deposits, gold accumulation plans, gold-linked accounts and pension products as it aims to restrict current account deficit (CAD) to 3.7% of the GDP in the current financial year.
The Mid-Year Analysis today said gold imports have been one of the major factors in deterioration of CAD which touched $78.2 billion or 4.2% of the GDP last year. It said gold-backed financial instruments can reduce the attraction of direct investment in bullion and jewellery in the domestic market and check substantial rise in imports.
“Gold-backed products will allow investors to gain the benefits of investments in the high-yielding commodity without actually investing in the physical commodity... Of course, gold-linked instruments will have to be hedged through direct purchases of gold, or in the derivatives markets,” it said.
Chief Economic Advisor Raghuram Rajan said the government was worried about imports of an unproductive asset like gold and its impact on CAD. Some gold linked instruments have been talked about by RBI but potentially there could be other financial instruments to attract investment, he said, and added steps were also needed to strengthen the corporate bond market.
Rising crude oil prices, along with increase in gold and silver prices contributed significantly to the import bill in 2011-12, which increased the trade deficit. The value of imports of gold and silver increased from $29.8 billion in 2009-10 to $61.5 billion in 2011-12. The share of gold and silver in total imports increased from 7.6% in 2005-06 to 12.6% in 2011-12.
In the first half of 2012-13, the country saw a decline of 32.5% in gold and silver imports. This can partly be attributed to increase in customs duty on gold imports. Concerned over the sharp rise in the growth of gold loan companies, RBI has also been tightening norms for NBFC’s lending against gold.
The trade deficit in April-October 2012 was $110 billion as against $106.8 for April-October 2011. However, given the present indications, it is expected that the trade deficit in the current year would not be significantly higher than what it was last year. Consequently, it is reasonable to expect that CAD as a ratio of GDP would be lower than what it was in 2011-12, the analysis said.