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Knowledge Center » Economics » PERILS OF IMPORTING GOLD

As per the World Gold Council, India has over 20000 tonnes of gold. The market value? Over 1.2 TRILLION USD.That’s more than half of India’s GDP.   India is the largest consumer of gold in the world, and this doesn’t even account for the gold being smuggled in (500kg / day according to a recent news report). To curb this insane demand for gold, the government periodically hikes the duty (which leads to more smuggling).The current duty is at 6%, while the RBI has separately imposed a ban of import of coins and raised customs duty on jewelry at 15%. India’s poverty can be attributed to its richness (in gold). It is our desire for gold that is the reason for our huge Current Account Deficit. Having a high current account deficit leads to inflation, weakness in the Indian Rupee as well as higher dependence on foreign capital which leads to a volatile domestic currency.Why do we want gold? Most Indian’s look at gold as an investment for the long term rather than for consumption. It is a means of saving.  Once the gold is turned into ornaments, it is rarely sold. The original price becomes irrelevant and is very rarely sold even in bad financial situations because of the heavy losses incurred on the making charges, low selling price and the sentimental value attached. Secondly, it is believed that gold provides a natural hedge against inflation. So anyone who believes that inflation will remain a problem in the coming times will want to have investments in gold. Investors who believe that the Indian Rupee will depreciate will also prefer gold as the Rupee value of gold would increase. Also, gold is considered a safer asset as compared to equities as it remains stable even when equity markets are in turmoil.So what can we do? Well, basic economics says that the price of any commodity moves opposite to the supply. To reduce the price for gold, we should look at increasing the available supply in the market. How do we do that? One way is by providing incentives to temples/charitable institutions to deposit their gold in return for some interest. Such deposits can be used to satisfy the domestic demand for gold rather than importing the yellow metal. Imagine the effect it could have if all such institutions decided to deposit a major part of their gold. Every tonne of gold that is mobilized to meet domestic demand will save India about Rs 300 crores. Also, there should be mechanism for retail investors to deposit/sell of their gold without any major losses. Currently, the losses can be as high as 30% when you consider making charges/charges to convert ornaments back to bullion. There should be no taxes on such transactions .Only when appropriate steps are taken to reduce the gap between the purchase price and the price at which the gold is sold will there will be an increased supply of gold in the market. The consequence of establishing a suitable mechanism for mobilizing already existing gold in the Indian market as well as providing a system to retail investors to exit without facing huge loses? The demand for gold imports will go down by a huge margin thus reducing the Current Account Deficit, India’s dependence on foreign capital will reduce, the Indian Rupee would strengthen and the volatility in the currency would reduce and the ugly inflation numbers will come down. All this would in the longer term, lead to increased growth and investment coming back to India.