Gold Mania Virtually Over In India?

OCD or obsessive compulsive disorder can be synonymous to India’s obsession with gold. The yellow metal has always been the most sought-after investment avenue across the country. However, this obsession for gold has been negative for the country’s trade balance due to increase in imports bill.

Gold & CAD
India’s trade deficit has been fuelled by high imports of gold and crude oil, contributing to the current account deficit (CAD), which has touched an all-time high of 4.8% of GDP or $88.2 billion, in 2012-13. During the first half of the current fiscal, gold and silver imports rose 8.7% to $23.1 billion. Oil imports during April-September also grew 3.58% to $82.87 billion. In contrast, non-oil imports declined 4.55% to $149.35 billion. In September this year, these dipped 24.19% to $21.24 billion. Therefore, gold import is mainly responsible for the rise in CAD and impacts the foreign exchange reserves of the country, as well as the value of rupee.

RBI stance on gold
The Reserve Bank of India (RBI) and the Indian government battling a record high trade deficit, coupled with weak Rupee, are trying to curb gold imports, the most expensive non-essential item in its imports bill. The more Indians buy gold and buy it with dollars, the money moves out of the country, pushing the Rupee downwards.

The RBI introduced the 80:20 scheme in July, under which 20% of the gold purchased from overseas had to be exported to avail further import of the metal. The restriction was aimed at curbing the widening current account deficit. Moreover, in a bid to fight the rising gold imports, the government has been raising the import duty on gold over the past few months – from 1% in January 2012 to the current 10%. In September this year, it also increased the import duty on gold jewellery to 15% from the previous 10%, in an effort to protect the local gem and jewellery manufacturers and exporters from gold jewellery imports.

According to government data released in October this year, gold imports during July-September 2013 was pegged at 63.13 tonne, valued at $2.69 billion, which was down 28% in volume and 77% in value over the corresponding 2nd quarter of the previous fiscal. This prompted a statement from the Finance Ministry who reiterated that this would enable the CAD to be limited to $70 billion as per the target. India’s gold imports in August dipped to $0.65 billion from $2.9 billion in July and a record $8.4 billion in May.

Price trends in metros & non-metros
During April-June 2013, NHB Residex shows fall in real prices (inflation-adjusted), mostly in metros like Chennai, Hyderabad, Kolkata and Bangalore, whereas marginal increase was seen in Delhi and Mumbai.

India’s foreign trade and future outlook
India’s trade deficit improved substantially in September 2013, raising hopes that the FY14 CAD will be much lower than the government’s estimate ($70 billion). At $6.8 billion, the September trade deficit touched the lowest level in 30 months. Exports during September, 2013 were valued at $27,679.33 million (₹1,76,461.53 crore), which was 11.15 % higher in dollar terms. Imports during the same period were valued at $34,439.50 million (₹ 2,19,559.04 crore) – representing a negative growth of 18.10 % in dollar terms and a negative growth of 4.38 % in rupee terms.

Imports have been on a downward trajectory of late, with the sharpest fall seen in September 2013.

The government’s and the RBI’s efforts in curbing gold imports helped to lower the demand for gold after the April-May spurt. Gold imports for August and September stood at $1.5 billion, the lowest in 52 months.

Lower industrial growth has also led to muted demand for non-oil, non-gold imports. For April-August period this year, machinery and project goods imports were down 12% and 38% YoY, respectively. Industrial growth recovery during the 2nd half of FY14 is likely to revive non-oil, non-gold imports, potentially reviving overall imports. Having said that, overall trade deficit in FY14 will still be lower than FY13 as export growth will remain favourable and imports will be well contained.

Financial inclusion through financial literacy with help from banks and other financial intermediaries is also required as most Indians refrain from participating in the capital market due to lack of knowledge. Financial literacy is crucial in creating awareness about the way capital market functions and also about the fact that the equity market provides relatively higher returns, coupled with higher risks, as compared to other investments like gold or real estate.


The author of this article is the Director of WealthRays Securities.