The recent fall in commodity prices, especially for gold, was expected to shrink the import bill. This was in turn expected to help narrow down the current account deficit (CAD). However, the massive spike in trade deficit caused by the sharp increase in gold imports during the month of April 2013 ended up exerting higher pressure on the CAD and thereby on growth. Though the spike in demand for gold during the April month was said to be an 'aberration', however the Indian policy makers are worried by the recent surge in gold imports. Gold imports have gone up by approximately 138% during the month of April.
Increase in CAD is an indicator of a country's external weakness. India is among world's largest buyers of gold. The country has been facing a problem of high CAD for quite some time now. The demand for gold in India has further increased following a steep fall in its price. The prices had hit a two-year low globally during mid-April. The Indian demand for gold has risen despite the government's efforts to reduce the metal's imports. The government of India has been continuously increasing the duties on gold imports but these steps seems to have had little impact on curtailing the demand for gold
The Reserve Bank of India (RBI) has already proposed some restrictions on banks in order to curb the gold imports. Recently, even the Finance Minister, Mr P Chidambaram, has stated that if required additional steps might be taken to control the gold imports.
The government actions clearly signify that, it will take all possible steps to restrict the gold imports. The widening CAD is a burden on a country like India. But on the other hand the government should also keep in mind the pitfalls of putting higher measures on this yellow metal. History tells us that higher restrictions on gold imports have encouraged smuggling. Thus, while deciding upon the various steps to control gold import the government should take such steps which would help the overall development of the gold markets in India. By introducing Gold ETFs (Exchange Traded Funds) in 2005-2006, the Finance Minister took a step forward and enabled investors to purchase gold in a more efficient manner. The government should introduce more such features which could serve purpose of controlling imports on one hand and also restricting the unlawful activities on the other.