Finance minister P Chidambaram has identified quantitative curbs and enhanced tariffs on gold imports as an important factor in bringing India's current account deficit (CAD) under control this year. At the same time, he has said up to three tonnes of gold are probably smuggled in every month. Gold smuggled in has to be paid for in foreign currency, which means that it is flowing out of India through fictitious accounts. This inconsistency is a reason why import restrictions on a scale that encourage smuggling are counterproductive. Moreover, the unintended consequence of a well-oiled smuggling network has adverse security implications.
The data shows a sharp turnaround in India's CAD over the last six months. CAD between July and October was $5.2 billion, or 1.2% of gross domestic product. To put the improvement in perspective, CAD had exceeded 6% of GDP for a while in 2012. A fall in stated gold imports contributed to the improvement as did a dip in machinery and coal imports and a pick-up in exports. The improvement in CAD appears to be a combination of exports responding positively to a fall in the value of the rupee and an improvement in US economy, as well as to a domestic slowdown curtailing imports.
Gold serves as an important financial asset for a typical Indian household. Our underdeveloped financial system inevitably leads to its demand, which cannot be checked for long through import restrictions. Also, a network established for smuggling gold is available for use by terror networks. The answer to a widening CAD is more economic reforms, not policies that simply push the problem out of sight. The more India is integrated with the global economy, the less effective are controls such as import restrictions.
Demands for rolling back restrictions on gold imports, in order to curtail gold smuggling, are inopportune. Import restrictions have reduced gold inflows. A rollback can reverse these gains and cause another import surge. This will once again worsen external sector imbalances and cause another run on the rupee. With emerging market currencies facing greater volatility following fears of a faster tapering of quantitative easing by the Federal Reserve, this is certainly not the right time to free gold imports and trigger another free fall of the rupee.
Freeing up regulatory restrictions on gold imports will have to await a sharp correction in macroeconomic imbalances, caused by government's inability to curb oil import bills because of subsidised consumption of oil products and the erosion of real return on assets due to rising prices. While availability of subsidised oil products bloated imports, rising prices forced people to shift savings from bank deposits and other assets to more attractive avenues like gold. The resultant surge in imports and current account deficit could only be halted by a sudden clampdown on gold inflows as curbs on oil imports would bring the Indian economy to a grinding halt.
Even if curbing gold imports leads to smuggling, the overall quantum of gold imports will still be reduced because of the difficulties of smuggling gold as opposed to buying freely available gold in the open market. Restrictions should be coupled with better monitoring and a tough crackdown on gold smuggling, so that smuggling rings do not take root. Along with this one can have financial products pegged to the price of gold, so that those who crave the security of gold can purchase these products instead. Today's dire macroeconomic situation admits of no other solution.
Source:- timesofindia.indiatimes.com
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