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വായന

08 January, 2013

Taking the glitter off gold

BRP Bhaskar
Gulf Today

The Indian government is eager to check the people’s hunger for gold as large-scale import of the precious metal is upsetting its efforts to hold down the current account deficit (CAD), which represents the gap between the value of imports and exports.

Early last year the government had doubled the import duty on gold to four per cent after the CAD rose to a record 4.2 per cent of GDP, pushed up by gold imports of $50 billion. Following this, gold imports declined: in the first quarter of 2012, they were 18.4 per cent less than in the corresponding period of the previous year and in the second quarter 30.3 per cent less. In the third quarter, imports registered an increase of nine per cent but there was no increase in 2012 as a whole.

However, the government worried since a mid-year appraisal showed the CAD had risen to 4.6 per cent of GDP in the first half of the fiscal and that gold imports of $20.25 billion were a major contributory factor.

Thanks to investment inflows — $12.8 billion in foreign direct investment and $1.7 billion in foreign institutional investment — the government could manage the CAD without dipping into the foreign exchange reserves. In fact, there was a marginal increase of $40 million in the reserves. Yet policy-makers agonised over the fact that if only gold imports had been halved the increase would have been more than $10 billion.

The United States topped the 2012 World Gold Council (WGC) table of holdings of countries with a massive hoard of 8,133.5 tonnes. Germany, with 3,396.3 tonnes, was a distant second. India was at the 11th place with 557.7 tonnes.

In private gold holdings, India led the rest of the world. The WGC estimated early last year that Indian households held 18,000 tonnes of gold. Later in the year it revised the figure to 20,000 tonnes of gold, valued at $1.16 trillion. This is equal to two-thirds of GDP and more than 70 per cent of market capitalisation of India’s listed shares.

The WGC estimates of non-governmental holdings do not include the gold content of the vast treasures of religious institutions. The enormous wealth hoarded by Hindu temples in the northern parts had attracted looters from across the border in the medieval period. Until recently the Venkateswara temple at Tirumala in Andhra Pradesh, which possesses gold, coins and other valuables worth Rs320 billion, was believed to be the richest shrine. It lost the honoured place recently when some vaults of the Padmanabhaswami temple at Thiruvananthapuram, capital of Kerala, opened on court orders, revealed a dazzling collection of gold and other valuables. Some observers believe its assets may be worth Rs1.2 trillion. How much of it is in gold will be known only when an inventory which a team of experts is preparing is ready.

India’s infatuation with gold has a long history. There was a continuous flow of gold into the country through trade surpluses until the 17th century, when colonial plunder began. As economic uncertainty gripped the society, the appeal of gold as a means of ensuring security grew. Apart from economic factors, cultural and religious traditions also drive the demand for gold.

The government wants to take away the glitter of gold with a view to depressing demand and reducing imports.

Last year the Reserve Bank of India, the central bank which supervises monetary affairs, set up a working group to ascertain whether large-scale gold imports are a threat to external stability. It was also asked to look into the working of non-banking finance companies, which lend against gold, and check if they posed a threat to the financial system.

The working group saw no systemic issues but recommended dematerialisation of gold. It proposed that gold-backed financial instruments be designed to reduce the demand for gold. Its recommendations are now in the public domain and the RBI has given the public time till January 18 to respond to them.

The government is keen to give effect to its proposals. Its stance can be seen in the context of the current push for economic reform. The WGC has been asking countries hit by the economic downturn to use a portion of their gold reserves to back sovereign debt. With WGC support Indian corporate giant Reliance has drawn up a plan which offers people the opportunity to accumulate physical gold using a daily price averaging methodology. --Gulf Today, Sharjah, January 8, 2013.

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