When restrictions on gold import were imposed in August 2013 by introducing the 80:20 rule, the decision was jointly taken by the previous United Progressive Alliance (UPA-II) government and the Reserve Bank of India. The rule essentially mandates traders to export 20% of their all gold imports.
“Taking into account all these representations and in consultation with the Government of India, it has been decided to issue the following clarifications/modifications in supersession of all the earlier instructions,” the RBI circular issued on August 14, 2013, had said. The decision was aimed to tackle the widening current account deficit amid a worst ever currency crisis since the balance of payment crisis of 1991.
In the last week of November, while announcing that the 80:20 principle was scrapped, the central bank distanced it from the decision and acted just as a messenger.
“It has been decided by the Government of India to withdraw the 20:80 scheme and restrictions placed on import of gold,” the November 28 notification from the RBI said.
Clearly, the central bank was not a party to the withdrawal decision, as the notification clearly said it was decided by the government of India, unlike the previous statement when the decision was taken in “consultation” with the government.
Various restrictions on gold import, apart from hiking import duty, resulted in imports dropping to nearly 70% during the second half of 2013 to about 90 tonnes per quarter as against an average of 225 tonnes in the previous eight quarters, according to a report by rating agency ICRA. The move also forced a few jewellers to scale down expansion plans.
Import of the yellow metal is once again rising which could be a matter of concern for the central bank.
Gold imports surged to 151.58 tonnes in November, an increase of 38% from 109.55 tonnes a month earlier, trade ministry data showed on Tuesday.
Data released on Monday showed gold imports surged in value terms in November to $5.61 billion, helping push the trade deficit to an 18-month high.
The demand for gold jewellery witnessed a spike in recent times after RBI allowed premier and star trading houses to import bullion under the 80:20 rule in May.
A sharp rise in gold imports and a fall in export growth has already pushed the country’s current account deficit (CAD) to $10.1 billion or 2.1% of gross domestic product (GDP) during July-September second quarter, as compared to $7.8 billion or 1.7% of GDP in the first quarter ended June.
RBI may have seen what is coming and was therefore not willing to scrap the restrictions completely.
Some analysts have upped their CAD projections for the current financial year. Japanese broking firm Nomura for example, now sees CAD at 1.6% of GDP as compared to 1.3% projected earlier. RBI 's comfort zone for CAD is 2.5% of GDP.
(Manojit Saha is Banking Editor at Business Standard)