What is the issue?
- Gold imports are a major strain on the country’s Balance of Payment (BoP).
- But there are indications that this pressure will ease in the current fiscal due to several economic factors and policy initiatives.
What are the recent trends in the market?
- 2017 Trend - While there has been a recent drop in demand, on a whole, gold imports have considerably increased over the last year.
- A combination of retail restocking and high rural demand is thought to have pushed gold imports up by 67% in the financial year 2017-18.
- Overall, the gold import bill had rose by 13% (to $34 billion) and returns for Indian investors were 1% higher than the global average of 6%.
- Current trend - ‘Akshaya Tritiya’ is perceived an auspicious to buy gold, and demand for gold is usually higher around the occasion (recently).
- But this year’s occasion was a damper due to high prices (Rs 32,500 for 10 gram), which is 10% higher than the previous year.
- Also, the rural earning stress and the cash crunch in the market are additional factors that have added to the demand uncertainty.
- Contrast - It is commonly assumed that higher gold demand is connected to the increasing anxiety about the macroeconomic stability.
- But the RBI has pointed out recently that the gold import figures have seen a sharp reduction in recent months – which contradicts the palpable anxiety.
Why should gold imports be curbed?
- An increase in imports of gold and precious gems is a form of capital flight out the economy and strains our trade balance and exchange rate.
- As precious gems are also another alternative to hedge against currency, “Gold vs. Economic conditions” graph might not have a direct correlation.
- Nevertheless, as gold is the dominant hedge, we need policies to constrain access to it and work for plugging the capital drain.
How does the future look?
- Economic Changes - “World Gold Council” has stated that enhancing transparency in purchases might bring demand down in many economies.
- In India, the “Prevention of Money Laundering Act, and GST” might suppress demand for the metal in the coming years.
- Also, many analysts hold that, as long as stock markets are effervescent (strong), gold demand will remain subdued.
- Policies - Finance ministry’s “Gold Schemes” has already garnered considerable traction and it is hoped that these will net Rs. 50 Billion in 2017.
- Notably, these schemes had a poor response when it was unleashed in 2015, which indicated that gold was preferred not just for speculative interests but also for its ability to prove evasive for tax authorities.
- As such, the continuing efforts by the government to increase its supervision of the sector are both welcome and likely to hit demand going forward.
- Additionally, various “electronic gold purchase schemes” have been run by mobile wallet providers such as Paytm – but its take-up remains doubtful.
Source: Business Standard
