Yellow fever

The tightening of the gold import policy by the Reserve Bank of India is a sign of its continuing concern over the large imports of the yellow metal into the country. The latest step seeks to ensure that at least 20 per cent of the gold imported from abroad is made available to the gems and jewellery exporters for export of gold products. Imports will be strictly monitored accordingly.

The Reserve Bank has taken a series of steps in the recent past to curb the import of and demand for gold. The import duty was raised to 8 per cent last month. A ban has been imposed on banks lending for gold purchases and against gold coins. The condition attached to gold imports is expected to reduce the availability of gold in  the domestic market.

The consequences of the high gold import bill on the trade balance and the on the current account deficit, which is too high for comfort at 4.8 per cent of the GDP, are well-known. The rupee has weakened to unprecedented levels, threatening to further increase the import bill. Increasing the quantum of exports is the best way to reduce the CAD.  The mandatory allocation of gold for export might help to push up exports of jewellery which have been falling in recent months. Gold imports have also fallen substantially after last month’s duty hike. But past experience is that the impact of  any measure is temporary and the demand picks up after an initial fall. The lure of gold is such that people love to buy it when the prices are low, and again buy it when the prices are high for fear that  they will go still higher.

All the steps which have been taken till now amount to putting restrictions on the import and availability of gold. They also lead to an increase in prices. The latest measure also will result in a hike in domestic prices. Smuggling increases as a consequence. It has been noted that the inflow of gold through unaccounted channels has increased. This in fact will have a more deleterious effect on the economy. Since the results of the restrictive measures are likely to be mixed, the government should also consider other steps which will wean people away from gold, like gold-linked investment schemes which will give equal returns. They may not reduce the wedding-related demand for gold, but may cut down demand arising from investment needs.