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- GS 3 || Economy || Banking & Financial Sector || Forex Market
Why in the news?
India’s gold imports in March surged 471% from a year earlier to a record 160 tonnes as a reduction in import taxes and a correction in prices from record highs drew retail buyers and jewellers.
Significance of Gold in economy:
Gold is a significant commodity in the economy. It has following three main significance:
- As Currency: Gold was used as the world reserve currency up through most of the 20th century. The United States used the gold standard until 1971. Gold is still one of the reserves of forex reserves in most of the countries.
- Gold and inflation: The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency.
- Impacts on Currency: When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country’s total exports.
Gold imports in India:
- In fiscal year 2020, India imported gold worth nearly two trillion Indian rupees.
- In post lockdown, due to relaxation in import duties, the import of gold has increased considerably. The duty on gold was 12.5 percent until 1 February, which has now been reduced to 7.5 percent.
- According to the World Gold Council (WGC), India is the world’s second largest gold consumer after China, with consumption of 712 tonnes in 2019.
- The government has taken various measures to curb the gold import surge but the measures have met to limited success.
Reasons of gold imports:
- Gold as contingency reserve for households: India has a very strong informal system of exchange where gold can be rapidly turned into cash, especially in times of emergency.
- Cultural affinity: Gold has special cultural significance in India. There are innumerable traditions of buying gold on auspicious occasions. Gold is also regarded as an integral part of marriage ceremonies. Gold is the symbol of the Hindu Goddess Lakshmi and considered highly auspicious. Gold is brought or presented on festivals like Dhanteras and Akshaya Tritiya.
- Status symbol: In India, gold symbolises wealth. In Indian weddings the Gold brought by the bride shows her family’s status and wealth. It is believed that a bride wearing 24k gold on their wedding to bring luck and happiness throughout their married life.
- Socio-emotional value: Gold carries a high perceived value and a high emotional quotient. It reinforces closeness of relationships.
- Great Ornamental Value: Women of every age and time have always loved wearing gold ornaments. Moreover, Gold ornaments are never out of fashion. It also may be remembered that wedding rings are also traditionally made of gold to mark a long lasting relationship.
- Lack of alternative investments: The lack of alternative investments is one of the reasons attributed for Indian investors favouring gold over domestic capital markets.
- Inadequate financial literacy and awareness: The average household in India is not adequately aware about the investments options. They instead invest in gold and real estate because they understand it easily.
Impacts on economy:
- High Current Account Deficit (CAD): The increasing imports of gold have adverse impacts on Current Account of India. India has to pay for its gold imports using its foreign exchange reserves.
- Adverse impacts on mobilisation of resources: Misallocated capital is the second problem faced by the Indian economy due to its gold rush. Buying gold is an investment. However, it is an investment that does not add much value to the productive capacity of the economy. Investments in the physical form of gold are either stored in bank lockers or get exchanged for making jewellery.
- Outward flow of capital: The gold imports essentially is an outward flow of the capital. For India to grow with double digit growth rate, it needs domestic investment.
- Impetus to Black economy: The gold can be used for illegal activity and unaccounted monetary transactions and therefore, it provides an impetus to black economy. For eg: According to the World Gold Council, Gold is possibly tied to conflict, human rights abuses and corruption in Africa and South America is through India’s gold market.
- Leads to corruption: The smuggled gold is also used in bureaucratic corruption, customs corruption, judicial corruption, etc.
Measures taken by the government:
- Raising import duty: As the first response, the government often tends to increase the gold import duty. However, this measure has led to large scale smuggling of gold.
- Gold Monetisation Schemes: Gold Monetisation Scheme was launched in 2015 to mobilise gold held by households and institutions of the country and facilitate its use for productive purposes, and in the long run, to reduce the country’s reliance on the import of gold.
- Revamped Gold Metal Loan Scheme (GML): It is a mechanism under which a jewellery manufacturer borrows gold metal instead of rupees and settles the GML with the sale proceeds obtained.
- Sovereign Gold Bond Scheme: It seeks to encourage people to buy gold bonds instead of actual gold. The Reserve Bank of India (RBI) issues these bonds on behalf of the central government.
- Crackdown on gold smuggling: Between 2016-17 to 2019-20, the Parliament was informed that gold smuggling to India has risen by 207 percent. In 2016-17, gold worth Rs 858 crore was seized. In 2019-20, it went up by another 13%. The Department of Revenue Intelligence (DRI) has been working tirelessly to crackdown on illegal gold smuggling
- Spread financial literacy and ease of investments: The government should take financial literacy more sincerely as in the absence of it, the investment goes to unproductive assets like gold and real estate sectors. The legal provisions of investment in the capital sector can also be simplified.
- Make gold bonds more attractive: The price of gold internationally is linked to the dollar. The new gold bonds, if made attractive enough, could become a substitute to rupee bonds.
- Rationalise import duty gold: The duty one old imports need to be rationalised. The rate and timing must be imposed after due deliberation and according to the emerging situation.
- Provide impetus to the gold and jewellery industry: A booming gold and jewellery industry not only mobilises the gold stored in safe houses but also increases exports and creates productive jobs.
- More robust intelligence and global cooperation: The illegal gold trade is well connected with a lot of foreign countries, to get rid of the illegal gold trade, the government needs to strengthen the intelligence system and also foster global cooperation in this regard.
Model Mains Question:
- Discuss the reasons for surging gold imports in India. What measures would you suggest to contain the gold imports? Explain.