Gold must move to a less-cash economy

A 33% fall in gold imports in April helped contain the current account deficit. This is welcome. But the decline at a time when the rupee is weakening against the dollar is counter-intuitive.

Indians have a penchant for the yellow metal. And as the rupee depreciates, many people would be expected to turn to gold for hedging of risks. However, much of the drop in gold imports is due to the abnormally high demand, following government’s policy moves. Gold demand, for example, surged by 58% in April 2017 as the market stocked inventory ahead of the goods and services tax (GST). Gold now attracts GST. Prior to that, April 2016 saw a steep fall in demand due to regulatory changes that the market reportedly found tough to absorb.

The World Gold Council’s data shows only an average 1.9% annual increase in net bullion imports during 2012 to 2017. A break up of the data quarter-wise shows that imports peaked to 362 billion tonnes in the second quarter of 2013, posting an increase of 145% in the same period the previous year. But imports fell sharply in the subsequent quarters after the government raised customs duties to curb import and save foreign exchange. It rose in 2015, except in the third quarter, only to decline again in all quarters of 2016. That year also saw a steep fall in jewellery fabrication.

The import surge in 2017 was on a lower base and, hence, made the growth look a whole lot better. As world growth picks up and prices start to rise and currencies turn volatile, gold’s attraction rises. For India to see a counter-trend, part of the explanation has to do with cash. Demonetisation hit gold purchases in 2016, and remonetisation helped gold imports recover in 2017. The recent cash crunch would have crimped gold buys and imports. Gold, too, must move to a less-cash economy.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

via Gold must move to a less-cash economy

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s