https://www.miningweekly.com

India curbing gold imports as inflows of the yellow metal wreak havoc

11th October 2013

By: Ajoy K Das

Creamer Media Correspondent

  

Font size: - +

Circa 1913 – “Needless accumulation of the precious metals by Indians – an uncivilised and wasteful habit, which damaged the Indian economy by absorbing redundant bullion from the West.” John Maynard Keynes.

Circa 1958 – “Dethronement of gold from the position it occupies in India deserves serious consideration.” IG Patel, former governor of the Reserve Bank of India (RBI)

Circa 2013 – “I would once again appeal to everyone: Please resist the temptation to buy gold. If we can have this for six months . . . one year, it will dramatically change the situation of the current account deficit.” Palaniappan Chidambaram, Indian Finance Minister.

India’s fatal attraction to gold is a story foretold. Ingrained in social, cultural and religious mores, the fiscal remedies offered by government to wean Indians off the yellow metal could, therefore, have only a minimal impact.

Economic Affairs Secretary for the Finance Ministry Arvind Mayaram has said that gold imports during 2013/14 will be around 750 t, down just 11% from the previous year.

Sumitra Patnaik, a 35-year-old stay-at-home mother, is a compulsive gold aficionado who makes it a point to buy 10 g of 24 ct gold every month, spending Rs 34 000 (around $542), claiming she does it for financial security and the marriage of her 16-year-old daughter. She declines to reveal her household income.

Archana Saha, who works as a domestic helper and earns about Rs 8 000 (around $120) a month, buys gold jewellery every year during the Hindu festival season in September-October but shies away from revealing how much she spends.

The Hindu holiest shrine of Tirupati is said to be the biggest repository of gold in the country, but no definitive statistics are available from the shrine, which is operated by a foundation.

Jamal Mecklai, of market and risk management consultancy Mecklai Financial, says while there are no exact figures, the Tirupati Trust Foundation has well over 1 000 t of gold.

“The number, I am told, was 1 700 t, or about 5%, of the total 30 000 t to 35 000 t of gold held in India.”

“To get an exact picture, multiply the total amount of gold by $48.5-million (the value of a ton of gold at $1 350/oz). It comes to between $1.5-trillion and $1.7-trillion – something to be excited about.” Mecklai says.

“These being the assets which Indians own (and in foreign currency), it is hard to understand why we have a foreign currency problem,” he adds.

Mecklai is a strong advocate of commercially leveraging these gold holdings through Indian banks after paying an interest charge to the Tirupati Trust Foundation, which, he believes, could dampen gold import demand and ease pressures on the current account deficit.

While the efficacy of the out-of-the-box solution is debatable, given the religious sentiments involved, there is no doubt over the crippling impact of gold import demand on the current macroeconomic indicators of India.

“The demand for gold in India is influenced by many social, economic and cultural factors. The price of gold, rural income distribution, the quantum of black money, and the rate of return of alternative financial assets drive gold demand in India,” a report on gold importation prepared by a working committee appointed by the RBI says.

“The performance of gold against other domestic assets over the years is suggestive of the shift towards gold since returns from gold investment have outperformed other comparable assets during three of the last five years,” the report says of the rising imports.

According to the central bank, with domestic production of gold falling to an insignificant level, current gold consumption is met entirely through imports. Though it is generally considered that a current account deficit of between 2.5% and 3% is sustainable for India, it has been very high since 2011, and external resilience has weakened on account of gold.

“We are concerned over gold as a means of saving because it blocks off savings. We are also concerned about lending cash against gold by nonbanking finance companies because of financial stability concerns,” says Duvvuri Subbarao, who ended his term as RBI governor in September.

The RBI’s apprehensions are based on the rapid rise of gold as an instrument in financial intermediation markets. Nonbanking financial companies (NBFCs) borrow huge amounts of public funds for retail lending against gold through rapid branch expansion, and over 90% of the loan assets of these NBFCs are concentrated in loans against gold jewellery, at interest rates ranging as high as between 30% to 40%.

An RBI analysis of the yearly growth rates of total gold loans disbursed shows that the growth rate of gold loans disbursed by banks between March 2008 and March 2012 increased.

While the growth rate of such loans from NBFCs had fallen, it is still higher than gold loans disbursed by banks.

Since NBFCs fund most of their retail gold loans through borrowings from banks, any volatility in gold prices would put the entire banking system under strain.

The CEO of a leading NBFC, who did not wish to be named, said there was a high level of indebtedness in rural India and the easy availability of gold loans on flexible terms made gold loans highly attractive to large sections of the population not covered by the banking sector.

“The rural population sees gold as the most liquid saving instrument that can be converted into cash in the shortest possible time. That is the market which we serve through our extensive network,” he said.

One of the ways in which the Indian government is fighting rising imports of gold is to raise the import duty on gold. It has done so five times in the recent past - from 1% in January 2012, to 10% currently. It also increased the import duty on gold jewelleryry to 15% from 10% in September, in an effort to protect local gem and jewelry manufacturers and exporters from gold jewelry imports.

On the quantitative front, the RBI introduced the 80:20 formula under which 80% of imports would be for domestic demand while 20% of total imports would have to be re-exported through value addition in the form of jewelry.

Indian gold imports declined by a staggering 95% as result, to a mere 2.5 t during August, as government struggled to cope with the rising and the depreciating rupee, which slid 25% against the dollar between April and August 2013.

Imports were down 47.5 t in July, 31.5 t in June, a massive 162 t in May and 142 t in April, according to RBI data.

According to government data released in October 2013, gold imports during July to September 2013 was pegged at 63.13 t valued at $2.69-billion which was down 28% in volume and 77% in value over corresponding the second quarter of previous fiscal prompting a statement from the finance ministry reiterating that this would enable the CAD to be limited to $70-billion as per target.

According to data sourced from the Directorate General for Commercial Intelligence and Services, under the Commerce Ministry, Switzerland was the biggest exporter of gold to India, followed by the United Arab Emirates (UAE), South Africa, Australia and the US.

During 2012/13, Switzerland’s gold exports to India were valued at $29.5-billion, the UAE;s at $10.2-billion, South Africa's at $5-billion – close to half its total outward shipment of the precious metal – while Australia accounted for $3.1-billion and the US $3.4-billion.

The Indian government's bulwark against gold imports was aimed at reducing the current account deficit from $88-billion in 2012/13, or 4.8% of the country's gross domestic product (GDP), to $70-billion, or 3.7% of GDP, by close of 2013/14.

However, according to RBI data released in September, the current account deficit during April to June 2013 was up to $21.8-billion, or 4.9% of GDP, resulting from a rise in imports, including gold, and shrinking exports, and this compared with a current account deficit of $16.9-billion, or 4% of GDP, during the previous corresponding period.

However, independent economist Samiran Majhi points out that fiscal and quantitative restrictions could have only a limited salutary impact, since the problem is more structural in nature.

“India’s share of world trade is less than 2%, while it accounts for about 25% of world gold demand.

“At end of the day, the weight of gold on the economy can only be structurally tackled by increasing the global competitiveness of the Indian manufacturing sector and pushing exports – both have been in the doldrums in recent years and have not been a focus for industry or government,” he adds, highlighting that fiscal and quantitative restrictions on demand could hardly dent historical, social and retail economic compulsions that drive such demand.

“Simply put, Indians are on a gold-buying spree beyond their means, and not for economic value addition, which has been falling over the years,” Majhi says.

According to data from the Commerce Ministry, exports as a percentage of total gold imports have been declining from around 41% to 29% over the past five years, indicating that a high proportion of imports were for domestic conspicuous consumption at the cost of higher deployment of foreign exchange.

Considering the Indian penchant for conspicuous consumption and its ill-effects on the economy, the jury is still out on whether old habits will die.

Subbarao said days before relinquishing office: “In 1991, there was a heated debate, and also an emotional one, when the RBI pledged gold reserves to tide over balance of payment stress. It will be interesting to conjecture how history will judge the purchase of 200 t of gold by the RBI from the International Monetary Fund in 2010 and the more recent restraints in imports of gold?”

Edited by Creamer Media Reporter

Comments

Showroom

Yale Lifting Solutions
Yale Lifting Solutions

Yale Lifting Solutions is a leading supplier of lifting and material handling equipment in Southern Africa. Yale offers a wide range of quality...

VISIT SHOWROOM 
Booyco Electronics
Booyco Electronics

Booyco Electronics, South African pioneer of Proximity Detection Systems, offers safety solutions for underground and surface mining, quarrying,...

VISIT SHOWROOM 

Latest Multimedia

sponsored by

Photo of Martin Creamer
On-The-Air (15/03/2024)
15th March 2024 By: Martin Creamer
Gold, hydrogen, mining boost make headlines
Gold, hydrogen, mining boost make headlines
15th March 2024
Magazine round up | 15 March 2024
Magazine round up | 15 March 2024
15th March 2024

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION







sq:0.153 0.185s - 106pq - 2rq
Subscribe Now