Incremental gold imports alone will add close to 1% of GDP to the current account deficit (CAD) for 2011-12, taking the deficit close to 3.5% of GDP.
India?s gold import value may have jumped to record levels of around $50 billion in 2011on high prices and a weak rupee, jeopardising efforts to trim the already-high CAD this fiscal, market sources said. Imports stood at $38 billion in 2010.
The deficit remained unchanged at $16.9 billion in the July-September quarter from a year earlier, as a widening trade gap was offset by service-related inflows. The deficit could, however, be higher in the third quarter that saw merchandise exports slowing down sharply, even as imports of oil and gold in value terms remained high.
?Gold imports may have risen by more than 25% in 2011 in value to around $50 billion as prices have soared by around 30% from a year earlier. The rupee has depreciated. However, imports in quantity terms may have dipped by around 10% due to elevated prices,? Bombay Bullion Association president Prithviraj Kothari told FE.
India?s CAD is expected to widen further on the back of higher oil prices and a sharp rise in imports of bullion, machinery and electronics, the Reserve Bank of India said recently.
The rupee, which determines the landed cost of dollar-quoted gold, has depreciated by around 16% in 2011, making overseas purchases dearer for importers and adding to the worries of runaway prices of the precious metal for rural Indians who form the biggest chunk of jewellery buyers in the world.
Economists say higher import value of gold, considered as a rather idle asset compared with many other instruments, will adversely affect the current account and more than offset a surplus in services at a time when exports are slowing and imports rising. The country’s exports in November rose at a much slower pace of 3.87% to $22.3 billion, while imports surged 24.55% to $35.9 billion. The country’s current account, which comprises the balance of trade, net factor income such as interest and dividends and net transfer payments, stood at 3.7% of the GDP at $16.9 billion in the second quarter of the fiscal year through March 2012, up from 3.4% from a year before.
The huge surge in gold import value isn’t a positive sign for trade deficit, said CARE chief economist Madan Sabnavis. Around 10% of the imports don’t add much value to the economy, although there is a sentimental value attached to the purchases of gold, he added. Although remittances were higher in the first half, with the global economy slowing down, it’s difficult to gauge the actual current account deficit for 2011-12. ?In the best of times, we may have a 3.3% current account deficit. Otherwise, a 3.5% to 3.7% of current account deficit for 2011-12 is reasonable,? Sabnavis said.
India’s trade deficit in November was at $13.6 billion, primarily driven by oil purchases. Oil imports grew 32.3% to $10.3 billion in November. ?As per November data, goods exports have already moved to single-digit growth on reduced global demand. This, coupled with the sharp depreciation in the currency (which will expand the import bill in the near term), and the further drying up of capital inflows could worsen the current account deficit for the next two quarters,? Goldman Sachs wrote in its latest note.
Moreover, since jewellery accounts for around 65% of the country’s gold demand, most of the gold imports will remain unutilised for further economic activity, analysts said.
Gold rallied to a record $1,921.15 an ounce on the London Metals Exchange on September 6 and snapped an 11th straight annual increase, highlighting its persistent appeal as an investment tool. Domestic gold prices have risen by 32% in 2011, thanks to the global financial crisis and a weak rupee. Gold prices in Mumbai rose marginally to Rs 27,385 per 10 g from Rs 27,170 on Monday amid concerns that the government’s inability to arrest a widening fiscal deficit could drag down equities and trigger foreign fund outflows.
PMEAC chairman C Rangarajan had estimated the CAD for the current fiscal at 2.7%.