The huge imports of gold, the traditional safe haven for Indians, particularly in rural India, against financial and personal calamities is creating a dangerous situation for the country. It is increasing India’s balance of payments, adding to the depreciation of the rupee and eating into the not-so-bountiful foreign exchange reserves. Even more worrying is that the $33.9 billion spent importing gold in 2010-11 is unproductive because it either goes into making jewellery, is kept as gold bars and coins or hoarded in lockers. Even the RBI in its recent macroeconomic report expressed concern about the current account deficit burgeoning because of the inelastic gold and oil demand. The import of gold in the total import bill in a recent Assocham study shows it has gone up from 8.1 per cent in 2001-02 to 9.6 per cent in 2010-11, in value terms from $4,170.4 million to $33,875.7 million in the same period, and imports are growing at 25 per cent annually. The imports in 2010-11 were more than the GDP of 12 Indian states.
This is clearly unsustainable. Though the government has raised the import duty belatedly it is not likely to benefit much, according to trade sources, as the duty is on the value, and not weight, of gold. Considering the volatility in gold prices from hour to hour, or even less, it is a complex task.
The government should be able to get part of this hoarded gold into investments that can be put to productive use. In the 1960s it issued three different types of gold bonds and was able to ferret out around 36 tonnes. Today, with umpteen investment instruments, the government can surely use these to tap the old gold hoards, estimated at between 25,000 and 40,000 tonnes. It is explicable why the finance ministry has not thought of this and started schemes on a war footing considering the tremendous damage being done by such heavy gold imports and the squandering of India’s scarce foreign exchange reserves for unproductive purposes. China, for instance, with forex reserves of a massive $3,223 billion, imports just 769 tonnes of gold against 1,059 tonnes by India, which has a measly $283.8 billion in forex reserves.
India is said to have huge reserves of gold but there is little or no research and development done to tap this. China, after five years of R&D, increased gold production to 361 tonnes this year from 250 tonnes last year. India produces between just one and two tonnes per year, a shame knowing that India accounts for nearly one-third of the total world demand for gold. The government’s inaction is shocking, if not shameful. The people watching over our economy are obviously sleeping on their watch.