High current account deficit: Gold is not the villain, says Andy Mukherjee
Finance Minister Palaniappan Chidambaram claimed in his annual budget speech that, among other things, a "passion for gold" is responsible for India's high current account deficit. He proposed offering inflation-indexed government bonds to discourage people from using the yellow metal as a hedge against expectations of a 10 percent annual rise in consumer prices.
The minister's argument is arithmetically correct: Remove the $60 billion that the country, the world's largest bullion importer, spends annually on buying gold, and it would wipe out most of the $75 billion in overseas capital that India needs to cover its current account shortfall. This would put upward pressure on the rupee, helping the country draw in even more foreign capital. India could then join the credit-fuelled investment boom that is currently in full swing in smaller Asian economies like Thailand and the Philippines.
The attack on gold is not limited to rhetoric. The government has slapped higher import duties on the precious metal two years in a row. But the case does not stand up to logical scrutiny.
Granted, the country's current account deficit is very high at about 5 percent of GDP. A sustainable rate that does not raise risks of a currency crisis is about half that level, according to India's central bank.
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