Right step

Right step

The Reserve Bank of India (RBI) took the right step by liberalising import of gold by star and premium trading houses and jewellery exporters and allowing banks to provide loans to domestic jewellery manufacturers.

A number of restrictions had been placed in the last few months by both the RBI and the government to reduce the inflow of gold into the country as it was an important reason for the current account deficit (CAD) crisis last year.

The high level of gold imports was triggered by many factors.

One was the propensity of Indians to buy gold for weddings and other special occasions and to hoard it.

The other was rising inflation which persuaded people to look for safer investments and ways of savings.

The third was increasing international prices. It has been observed that when the prices are high in the international market, the quantity of gold imports into the country is also high.

The situation has changed now. International prices have come down in the last one year as a result of the recovery in the US and European economies, however slow it is.

If the global economy improves further, it will push down gold prices and lead to more fall in imports.

The fall in imports in the last year was substantial. The import bill came down from Rs 54 billion in 2012-13 to Rs 29 billion in 2013-14.

This helped the CAD position also to improve dramatically because almost half of the deficit had been created by gold imports.

The strengthening of the rupee is also bound to have an impact on the gold import bill.

When these favourable external factors and circumstances are there, there is no rationale for the remaining curbs on gold imports to stay. 

The important case against continuation of these restrictions is made out by the rise in gold smuggling.

The quantity of gold seized from smugglers has gone up in the last many months. It shows that the gold smuggled into the country has also increased.

The World Gold Council reported that there was a major increase in gold purchases in the UAE in the last six months.

Much of this gold may have come into India through illegal channels as the UAE is a source of gold smuggling.

This risk and the easing of the fiscal and other circumstances should prompt a reduction in the high import duties and removal of the remaining restrictions.