Dont go for gold! Dont purchase gold! #MV Misdiagnosis and policy errors created alarm about the current account deficit.Over the last three months, policymakers and market players have cheered the sharp decline in Indias trade deficit. The annualised rate of the current account deficit (CAD) is running at around $25 billion, based on the last three months of trade data - about a third of what one had feared at the start of this year. This run rate will likely rise as gold imports pick up on seasonal demand, but for the year as a whole, the CAD should be even lower than the governments estimate of $70 billion.The taming of the CAD has elicited cheers all around for the governments draconian restrictions on gold import and hikes in import duties. And why not? The rise of the CAD from an average of $11 billion over 2005-07 (around 1 per cent of the GDP) to $88 billion (nearly 5 per cent of the GDP) last year was seen as the mirror for all that was wrong with the Indian economy: dysfunctional politics and policymaking, loss of investor confidence, falling growth and rising inflation. So much so that credit ratings agencies, while downgrading Indias outlook, repeatedly cited the rising CAD as their biggest fear, even though the runaway fiscal deficit was the root cause.While the export growth slowdown is a big reason why the CAD blew up, most will point to the astonishing rise in gold imports as the key driver. Gold imports rose from an average of $15 billion (1.5 per cent of the GDP) through 2005-07 to $55 billion (3 per cent of the GDP) last year, peaking at $67 billion (3.6 per cent of the GDP) in 2011-12. Some of the $40 billion-increase in gold imports is clearly due to the growth in gems and jewellery exports, but not very much. Indias national income data provides a stark reminder of how much gold was used for pure investment purposes. Household investment in gold rose from an average of 1 per cent of the GDP over 2005-07 to nearly 2.5 per cent of the GDP. Using this and the pace of growth of jewellery exports, it is not unreasonable to surmise that roughly $30 billion of the rise in gold imports, that is, about 1.5 per cent of the GDP, was for investment.
Posted on: Tue, 29 Oct 2013 07:28:13 +0000
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