Is gold boon or curse for India?

Moneycontrol Bureau

Rise of physical import of gold has been blamed for the high current account deficit which is likely to touch new record high this year. As gold imports increased pushing up the current account deficit to a historic high of 4.2 percent in the year, the Reserve Bank unveiled a slew of curbs on gold purchase and financing.

Explaining the situation, D Subbarao, Governor, RBI stresses that the central bank is concerned about gold as means of saving.

"We are concerned about gold, lending against gold by non-bank finance companies (NBFCs) because of financial stability concerns and we have been concerned about gold from an external management perspective because of the pressure it puts on current account or capital account depending on your account for it," he explains. Subbarao was speaking at the Indira Gandhi Institute of Development Research (IGIDR) annual conference.

However, he clarifies that RBI has not put any fresh restriction on gold but only barred banks from lending for purchase of gold.

Last year the total import of gold was about USD 60 billion and import has been ranging in USD 30-40 billion. Therefore last year an additional USD 15-20 billion has been imported partly because of the high level of inflation and treating gold as a hedge against inflation.

Sharing a similar concern, C Rangarajan, chairman of the Prime Minister's Economic Advisory Council (PMEAC) feels banning import of gold will be a bad idea which will only result in smuggling.

"We should dissuade people from holding an asset which does not give a rate of return, but you can’t go beyond a particular point. The number of weddings in this country is not going to decrease, if anything it will only increase and therefore the gold demand will be there. But to the extent which we can moderate inflation we certainly can reduce the abnormal increase in the import of gold that we have seen last year," he reiterates. 

Rangarajan feels that gold import can come down to normal levels as inflation eases.

However, former RBI chief YV Reddy does not really agree to the theory.

According to Reddy, prejudice against gold is gender specific.

"If Mercedes Benz can be imported, if aftershave lotion can be imported why not gold? Secondly it is both an investment good and a consumption good, we actually use them both. Many people seem to mistake that it is only hedge against inflation. Therefore I think we have to take not a judgmental view, not a paternalistic view, there is a demand for it, it is being imported, if you can try to stop it," he adds. 

Nasrin Sultana

nasrin.sultana@network18online.com