FE Editorial : Gold’s less of a problem
Given the 40%-plus annual increase in gold imports (in rupee terms) for the last few years, finance minister P Chidambaram is understandably worried about the impact of this on the current account deficit (CAD). Indeed, while gold contributed about 20% to the trade deficit between FY07 and FY09, this rose to nearly 30% between FY10 and FY12, RBI’s latest report on gold points out. According to RBI, the trade deficit without net gold imports would have been 2.1 percentage points of GDP lower than the 10% of GDP recorded in FY12. Which is why the finance minister has hinted at the possibility of hiking import duties on gold if people don’t lower their consumption of gold. Though given how, RBI data tells us, gold is by far the most attractive investment option—between January 2008 and May 2012 it gave cumulative returns of over 270% versus around 80% for the Nifty—it’s understandable why people are investing in gold. In which case, the finance minister may well have to hike import duties on gold, and hopefully his tax sleuths will ensure smuggling levels don’t rise to take advantage of the resultant rise in arbitrage.
But looking at gold in isolation is incorrect, more so since gold is at the same time a consumption as well as an investment product. And if we can look at the impact of gold on the current account deficit, why not look at the impact of oil imports, more so
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