Thursday, February 23, 2012

India's gold imports at US$58 b




The Prime Minister's Economic Advisory Council headed by Dr. C.Rangarajan has observed in its review of the economy for 2011/12, released on February 22 in New Delhi that imports of gold touched a high of US$58 b as compared to the statistically normal levelsUS$33 b, and it accounted for 5.7 of imports. Rangarajan said this could be attributed as a hedge against inflation. But this was not something that the council members perceived as a positive trend.

The review notes: "The import of gold, which is viewed by many, if not most, Indian buyers as an investment object, forms a large component in overall imports and variation in this element accounts for a very sizeable component in the change in Current Account Deficit (CAD). The dynamics that influence the import demand for gold seems to be most closely related to those which influence asset building, rather than those which influence merchandise imports."

What the review does not say is that preference for gold as an investment option does not help in increasing economic activity and there is a need for shift away from buying of gold for real economic growth.

It has been seen that capital inflows have not been adequate and combined with the depreciation of the rupee in the foreign exchange market contributed to the 3.6 per cent current account deficit which is being perceived as unsustainable and that it needs to be moderated to 2.5 per cent.

While noting that the capital inflows have been slow due to the difficult external situation, the review still believes that improvement in capital inflows will help in improving the current account deficit figure.

The other worrying factors were the decline in gross domestic investment (Gross Domestic Fixed Capital Formation or fixed investment rate) from 32.9 in 2007-08 to 32.3 per cent in 2008-09 per cent to 31.6 per cent in 2009-10 to 30.4 per cent in 2010-11. The drop in gross domestic savings rate from the pre-crisis levels from 36.8 per cent in 2007-08 to 32.3 per cent in 2010-11 is also turning out to be cause of concern.

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