Economic Survey: Curb price rise to cut gold import

NEW DELHI: The best way to reduce gold imports in a sustainable way, the Economic Survey 2012-13 said, would be to offer the public financial investment opportunities that generate attractive returns. This means bringing down inflation as well as expanding the range of investment instruments will go a long way in curbing the gold imports.\
In the last three years, there is a substantial rise in gold imports to India, which is one of the largest consumers of gold with consumption increasing from 721.9 tonnes in 2006 to 933.4 tonnes in 2011 and 612 tonnes in the first three quarters of 2012, accounting for around 27% of world gold consumption in 2011, and 26.4% in 2012 during January-September 2012.
The value of gold imports increased nine times between January 2008 and October 2012, contributing significantly to the current account deficit along with oil. The imports of gold constitute 30% of its trade deficit. Net retail investment constitutes 39.2% of the India's total gold consumption in 2011 and 32.5% during the first three quarters of 2012 in terms of quantity. According to a RBI report, one of the major components of gold demand in recent years has been investment demand at global level. India is also not an exception.
Rising gold prices in recent years have not contained the gold import to the country, which suggests that investment in gold is becoming price inelastic. In fact, according to the survey, in the October-December 2012 quarter, the non jewellery gold import constituted 40% of the total imports. The survey pointed out that attractiveness of gold as an investment asset improves with the rise in the inflation, which reduces the return on other financial instruments. This is reflected in the negative correlation between rising imports and falling real rates.
The global economic crisis also adds to the shine of the yellow metal. Volatility in international gold prices in recent quarters is positively skewed, implying that it provides fewer large losses and a greater number of larger gains. Global gold prices, as denominated in dollar, have doubled since 2008, and increased three times as denominated in Indian rupees.
The government has already taken a number of measures like raising the import duty to curb the import of the metal. In Budget 2012-13, import duty on standard gold and platinum was raised from 2% to 4% and non standard gold from 5% to 10%. On January 21, 2013, the Import duty on standard gold and platinum was further increased to 6%.
These measures have yielded positive result as the value of gold imports during April-December 2012 declined by 14.7% to $38.02 billion and quantity of imports fell by 11.8% compared to same period of previous year. Total gold consumption has also declined by 23% during the first three quarters of 2012.
The survey said while the supply of gold through organized channels can be constricted, there is need to be vigilant regarding gold inflows through unauthorized channels. ``Ultimately, the best way to reduce gold imports in a sustainable way will be to offer the public financial investment opportunities that generate attractive returns,’’ it said.
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