A tighter grip

The $4.4 billion increase in the current account deficit graph in April marks an expectedly shortlived decline of the export-import gap on a year-on-year during the previous three months. The record imports growth of 11 per cent is an indisputable function of growing gold imports, which increased 138 per cent, taking advantage of the volatility in prices of the yellow metal.

The tempo of high gold sales and high bullion imports continues to be fanned by the traditional Indian obsession with the metal as a hedge against everything from bad luck and myopic financial planning to inflation and familial dissensions. The RBI has stepped in, and rightly so, to contain buyer sentiments by restricting the import of gold on a consignment basis by banks – in short, allowing gold imports only to meet the requirements of jewellery exporters. This is imperative considering that even oil imports have fallen by $800 million from a year ago.

By confining gold imports to those required to meet genuine needs of exporters of gold jewellery, the RBI can effectively put the brakes on supply. But if the brakes are slammed unduly hard in the months ahead—when gold demand is expected to moderate—that would harm banks who will have to import gold on deferred payments or borrowings, driving up their import costs. Bullion resellers would be hard put to survive as well, and the high numbers of unregistered dealers thriving in the country could give smuggling a golden lease of life.

Investors have expressed concern about India’s gaping current account deficit—a good crisis indicator—as much as the yawning budgetary deficit. Both are likely to reach a record 5 per cent of GDP in fiscal 2013. It is notable that RBI’s action on gold consignments will yield faster results once demand is seasonally adjusted, and therefore, such restrictions need not necessarily be permanent. In fact, the next battle to tame the trade deficit will be in the area of non-oil imports which have consistently grown every month, even after accounting for seasonal demand divergences. And, exports growth which looks worrying at first glance, has only dipped marginally since December last year, and with the exception of March 2013, have actually grown on a year-on-year basis. Hence, there is hope, and justifiably, that export growth will continue in the face of stagnant global demand. 

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