Government is mulling ways to curb gold imports, as it is causing trade gap to widen and also current account deficit. The writer suggests that the government should maintain it as an attractive investment avenue while framing policies.
The import of two items contributes disproportionately to India's record trade gap and current account deficit.
One of these, namely energy imports, is unavoidable. The strong demand for the other item - gold - is driven by several factors and may perhaps be reduced.
India imports up to a quarter of annual global production, and gold imports equal 75 per cent of the current account deficit. Gold has always been a traditional repository of savings, and households contribute 80 per cent of demand.
An estimated 25,000 tonnes of bullion is held by Indian households. While that is an impressive stock of wealth, it is unproductive and earns no interest. It has, however, been an excellent hedge against inflation.
In the last three years, high inflation and slow GDP growth have made alternative assets like equity and debt unattractive. At the same time, gold has gained against hard currencies, as debt-to-GDP ratios have hit worrying levels across the euro zone and the US.
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