The global rating agencies were the first to point it out. But ever since the government started worrying about the ballooning current account deficit (CAD) problem, it started seeing red in India's appetite for the precious yellow metal, gold .
Since then, the Reserve Bank of India (RBI) too is taking various measures to tighten gold imports. Here again the attempt is to stem the fall of rupee against the US dollar. Recently, the RBI implemented new norms to regulate gold imports into the economy. As per the announcement by the central bank, 20% of imports must be utilized for overseas sales. Further, the importers will have to retain 20% of the imported gold in customs based warehouses. Also, they will only be able to buy more after exports equivalent to 75% of the retained amount of gold has been shipped. It is also important to note, the said restrictions are now applicable to unrefined gold also. This is likely to address the loophole in import duty, which was hiked on the refined gold only. Having said that, will these measures be helpful in addressing the economic issues?
The gold jewelers and gold loan companies were not the only ones to be impacted by the new norms. The economy as a whole may have to bear the brunt of the government's pessimistic views on gold.
An per article in Business Standard, there have been increasing instances of gold smuggling in India and neighboring countries, including Nepal, that have put restrictions on gold imports. Now that makes the government's worst fears come true.
The restrictions may control the regulated gold import market. But the heightened activities in the unregulated markets might only defeat the purpose of restricting gold imports.
Moreover such restrictions cannot possibly help investors abstain from buying gold for their portfolio. The Finance Minister, has been repeatedly requesting Indians to avoid investing in Gold. But with the debasement of currencies and risk of inflation gold is unlikely to lose its lure too soon. Gold had witnessed positive trend in 2012 , the same has continued into 2013 as well. Though, the pace has slowed down, it continues to be a safe haven asset in uncertain times. Given that the curbs on gold imports are actually backfiring, the government and the RBI may want to reconsider their decisions.