‘Country cannot afford to spend so much on importing gold’
Worried over the widening current account deficit (CAD), in a large measure owing to rising imports of gold, Finance Minister P. Chidambaram, on Wednesday, indicated that steps were under consideration to render its imports ‘a little more expensive’ to curb demand for the yellow metal.
Addressing a press conference here on the CAD situation and other issues, Mr. Chidambaram said: “…gold imports constituted a substantial chunk of the imports and is a huge drain on the Current Account…I would therefore appeal to the people to moderate the demand for gold which leads to large imports of gold. I may add that we may be left with no choice but to make it a little more expensive to import gold. This matter is under Government’s consideration.”
Mr. Chidambaram noted that CAD — representing the difference between exports and imports after considering cash remittances and payment — had risen to $38.7 billion or 4.6 per cent of the GDP (gross domestic product) during the first half of the current fiscal. Of this, a major contribution was by way of gold imports, amounting to $20.25 billion.
Citing figures, the Finance Minister went on to point out that as against the marginal accretion of $0.4 billion to the country’s forex reserves during April-September, the increase would have been many times more only if gold imports had been half the actual level. “Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserves would have increased by $10.5 billion,” he said
Mr. Chidambaram argued that the country “cannot afford to spend so much on importing gold. Nobody says gold within the country should not be used for whatever purpose. There is enough gold within the country. But import of gold is huge strain on the current account.”
During 2011-12, gold imports amounted to a foreign exchange spending of $56.2 billion and to curb the rising demand for the precious metal, the then Finance Minister, in his Budget for the current fiscal, had double the basic Customs duty on standard gold bars to 4 per cent from 2 per cent and on non-standard gold to 10 per cent. Even as certain other measures had to be moderated, the hike in duty did lead to some decline in imports.
Gold imports during the first six months of 2012-13 in value terms stood pegged at $20.2 billion, marking a decline of about 30.3 per cent over the like period a year ago. Thus, the decline can partly be attributed to increase in customs duty on gold imports by government in January and March, 2012.
However, Mr. Chidambaram did not buy the argument that increase in customs duty on gold did and could further lead to increased smuggling. “May be some smuggling has taken place but whatever level of duty, there is always smuggling.”
As for the major contributors to a widening CAD, Mr. Chidambaram said they were a decline in exports, which slipped by 7.4 per cent during the April-September this fiscal, coupled with a rise in imports by about 4.3 per cent during the six-month period.
However, the gap in export and import, he said, was partly made up “by an increase in services exports of 4.2 per cent and, consequently, surplus in services which amounted to $29.6 billion and remittances of $32.9 billion.”
What was particularly positive a worrying situation was that the widening CAD was financed without drawing on country's foreign exchange reserves, mainly because of adequate inflows of FDI ($12.8 billion) and FII ($1.7 billion). The net result is that “we have not drawn on the foreign exchange reserves and, in fact, there is a marginal accretion of $0.4 billion to the reserves,” he said.
“While the CAD is indeed worrying, I think it is within our capacity to finance the CAD, thanks to FDI, FII and ECB. I would like to once again underscore the crucial importance of FDI and FII. As I have said before, attracting foreign funds to India has become an economic imperative,” he said.