Finance minister Pranab Mukherjee agreed to reconsider tax on unbranded jewellery on Wednesday. However, he was absolutely clear that there would be no change in the proposal to hike the import duty on gold.
Indians love to own gold. The love for the yellow metal grows each passing day. In 2011, household consumption of gold in India was $ 45 billion. Two years ago, it was $ 19 billion, according to Morgan Stanley, an investment bank.
However, this craving for the yellow metal is now hurting India's economy.
Here is why we need to curb our gold lust:
• India’s household gold consumption of $ 45 billion is 82.1 per cent of the estimated current account deficit of the country at $ 56 billion. Total gold imports for 2011-12 are estimated at $ 55bn. India imported around 800 tonnes of gold in 2011. This is despite gold prices surging. Now, this is where it hurts the country’s current account deficit. The current account deficit occurs when imports of a country are higher than exports. The quantity of gold imports continues to rise despite a surge in global gold prices.
• India does not have a government that has an intention to rein in expenditure. The borrowing programme announced two days ago suggests that the government will continue to spend more than it earns in revenue. However, it realizes that the country needs productive investment in infrastructure and has to channelize domestic savings into productive investments. The imposition of a higher import duty on gold is an indicator that the government does not want you to buy gold.
• Unlike oil, gold is not a commodity India has to import. Hence, expect duties on gold to only rise going forward.
• On an average, Gold prices have surged by nearly 20 per cent each year, for the past 11 years. This indicates that the metal has its fair share of a bull run. Buying gold at current level is buying at record high prices. It would be a good idea to spread investments across financial products. While gold is an asset, investing in gold does not have a productive impact on the economy. The same capital when deployed in a business can create jobs and stimulate growth. For more insight, read what Warren Buffet said on gold here.
• The rally in gold is largely on the back of a huge demand from India and China. Industry association Assocham expects gold imports to touch $ 83 bn by 2015-16. India is still the biggest importer of gold in the world. According to Morgan Stanley, over the past 10 years, household gold consumption in India has increased at a compounded annual growth rate of 21 per cent.“The rising price of gold, particularly in the latter half of 2010, created a 'virtuous circle' of higher price expectations among Indian consumers, which fuelled purchases, thereby further driving up local prices,” according to the website of MCX, the Indian commodity exchange.
• In 2009, RBI bought 200 tonnes of gold from the International Monetary Fund for $ 6.7bn. The value of this gold now would be close to $ 20bn at current prices. This was perhaps a trigger for the virtuous cycle of rising gold demand and prices. With the trade deficit at $ 56bn and gold imports at $ 55bn, RBI would not consider any such move now despite higher foreign exchange reserves.
• The consumer demand for the yellow metal could already slow this year. This is because families have already bought gold needed for marriages or other rituals during the virtuous cycle. A surge in gold prices is already making people think about buying gold. A quick survey of 50 salaried people in the age group 20-35 suggests that only 15 per cent plan to buy gold in 2012. While this may be too small and concentrated a sample, it shows that rising gold prices are playing on the mind of the potential buyer.
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