Glittery Gold Jittery Government

Instead of cynically hiking import duty, Govt. would do well if it paves way for either virtual trading of gold or it should launch gold-indexed bonds instead of inflation indexed bonds.

Unmindful of its earlier failed efforts of controlling gold-import and discouraging its demand, Govt. once again resorted to the same trick by ratcheting up gold import duty to 8% from 6% (fourth hike within two years) disregarding the speculative undertone it might generate. Reserve Bank of India (RBI), in the vein of Govt., levied more stringent restrictions on banks to import gold and provide loans to public. Given the ballooning Current Account Deficit and badly depreciating rupee against dollar, curbing gold purchase seems the only viable step to Govt. to tame the imbalance of payment but it is highly unlikely if it would discourage the people to invest in gold as its being the safe and lucrative haven is a widely popular notion in the country challenging which is a tough nut to crack.

The unprecedented fall in gold prices in the month of April somewhat provided sense of relief to Government but unfortunately the impact of price-fall substantially got counterbalanced by surge in demand due to wedding and festival season in the country with gold imports touching 162 tonnes in May. Rising gold imports also pushed the trade deficit to $17.7 billion in April. Further trouble befell with the consistent depreciation of rupee which has now surpassed 57 against dollar bricking the prospect of even more widening CAD leading to even higher inflation which is already at an intolerant level.

It is in this backdrop that the Govt. has hiked gold import duty and RBI asked banks and nominated agencies to not import gold on a consignment basis for domestic use. Also, RBI disallowed import of gold on credit and advised banks to dissuade people from parking their savings in this glittery metal. Co-operative banks have been told to only lend against gold ornaments, gold jewellery and gold coins weighing up to 50 grams, amount of which must be within the Board approved limit. Though these measures might serve the purpose of Govt. in the shorter term but considering the fact that steps of similar kind have already been exercised earlier for no avail, it would not provide a medium term solution let alone long-term. The vicious cycle of yawning CAD, rising inflation, falling rupee and sputtering growth is the result of structural deficiencies but Govt. is hell-bent to put onus on Indian’s lure of Gold and fuel subsidies.

Considering the dearth of inflation-hedged investment options, Govt. has though launched the first tranche of Inflation Indexed Bonds but the fact that its coupon rate and principal amount are indexed against Wholesale Price Inflation (WPI) not Consumer Price Inflation (CPI), returns on these bonds would not be much profitable as its latter not former which directly affects the consumers. On the other hand Gold, despite its price-fall provides favourable return against rising inflation. Also, the ease of purchase, as against IIBs for which one has to go through the tedious system of opening bank accounts, filling up litany of forms, understanding complex formula etc, makes it handy and an obvious choice for investors over any other financial instruments.

Gold-frenzy is a global phenomenon. Only difference is that Government worldwide has channelled this frenzy into paper-based trading of Gold. Given this, instead of cynically hiking import duty, Govt. would do well if it paves way for either virtual trading of gold or it should launch gold-indexed bonds instead of IIBs. It is well past time to understand that it doesn’t matter how many hurdles or challenges being put up in the gold-game, Indians will bravely and enthusiastically sustain but would not give up till the end.