India’s trade deficit touching a record high of USD 37.8 billion in November is a cause for alarm. The larger trade deficit will push up the current account deficit for the September-December quarter to 2.8 per cent, compared to the earlier expected 2 per cent.
In the longer run, a high current account deficit could further erode the value of the already-declining rupee, making imports even more expensive and fuelling inflation. November’s figures came on the back of higher merchandise imports, mainly driven by an over-four-fold jump in gold shipments. The commerce ministry’s data showed that India’s gold imports touched USD 15 billion, accounting for a fifth of the month’s merchandise imports.
Anxious to curb gold smuggling, the government had slashed the metal’s import duty in July, sparking a buying stampede in the July-September quarter the likes of which had not been seen since 2015.
A World Gold Council report showed demand in India surging 18 per cent to 248 tonnes in the quarter. With international prices spiking, the council has now moderated the demand expectation for the financial year from the earlier estimate of 850 tonnes. However, demand is climbing again with the wedding season in full swing and investors turning to gold as a safe haven and a hedge against geopolitical instabilities.
India produces just about 1.4 tonnes of gold a year, compared to the 750-800 tonnes it imports to satiate demand. Despite prices doubling to Rs 79,000 per 10 grams over the last decade, the pressure to buy and hoard jewellery is a cultural diet that sees no reversal.
The metal’s availability in the mines may be finite; but its demand as an auspicious part of celebrations seems infinite. Despite campaigns to lower consumption, the country sees as much as 500 tonnes pumped into the jewellery market every year.
hough smuggling has abated over the years, an estimated 200 tonnes are still brought in without paying duties. Recent reports said gold is now being used as a currency to pay for Indian cereals, sugar and onions along the porous Bangladesh border.
As long as the cultural mores look at gold as a symbol of wealth, its imports as a ‘dead asset’ will be hard to reverse.