India imported $39.5 billion of gold in the first nine months of this financial year, but exported gold jewellery worth a third of that, despite the higher value of finished products. This indicated the yellow metal was used to hedge against inflation amid volatile markets and lack of other attractive options.
India exported gold jewellery of $12.12 billion in the first nine months, 30.68 per cent of the value of imported gold, said Ajay Sahai, chief executive officer and director general of the Federation of Indian Export Organisations.
Analysts say gold jewellery often has other embedded metals or stones such as diamonds. Hence, the value of gold parts in those exports would be much less than $12.12 billion.
In value terms, however, the growth in gold imports matched the expansion in gold jewellery exports. Gold imports witnessed a 40.23 per cent rise over $28.16 billion imported in the April-December period in 2010-11. Exports of gold jewellery also saw similar expansion. Exports were up 41.6 per cent over $8.56 billion in the corresponding period last financial year.
However, in volume terms, gold imports rose 20 per cent, against four-five per cent increase in gold jewellery exports, Sahai said.
According to the prime minister’s economic advisory council (PMEAC), gold imports were one of the reasons to push India’s current account deficit (CAD) to a level higher than that in the 1991 balance-of-payments crisis period. Much of this went into investment since India had high inflation till November (at over nine per cent), rather than into finished jewellery exports.
The PMEAC expects CAD to climb to 3.6 per cent of gross domestic product, worse than three per cent in 1991.
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The council expects CAD to rise to $63.2 billion this year, $18.8 billion more than $44.4 billion in 2010-11. Gold imports, according to the council, are expected to rise to $58 billion, $25 billion higher than $33 billion in the previous financial year.
If India manages to stall much of the rise in gold imports this financial year, CAD would not be that high. “The import of gold, which is viewed by many, if not most, Indian buyers as an investment object, forms a large component in overall imports and variation in this element accounts for a very sizeable component in the change in CAD,” the PMEAC said.
It pegs gold imports at $58 billion this year, against $33 billion last year. But Sahai said the council had taken both gold and silver into account. According to him, gold imports will be at $50 billion this year.
The council expects gold imports to fall to $38 billion next financial year, as stability in the macroeconomy, witnessing low economic growth and high inflation this year, is likely.
Sahai said gold imports had already started coming down. In January, it was down 20 per cent in volume terms. He attributed this to the revival in stock markets and change in the duty structure by the government.
The 30-scrip sensitive index of the Bombay Stock Exchange, or the Sensex, posted the highest January rise in 2012 in the last 18 years. In December, the government had restructured the duty structure in gold imports, imposing it on an ad valorem basis against specified earlier. It fixed the import duty on gold at two per cent of the value of imports, instead of the earlier rate of Rs 300 per 10 grams.
The World Gold Council expects India’s demand for the yellow metal to moderate, but does not expect it to be sharply lower. “India’s importance in the gold market will not diminish, even if demand growth softens. Not only is India a key player in the global gold market, but domestic drivers of gold demand are largely independent of outside forces,” it said, adding a lower number of auspicious days in the 2012 Hindu calendar year, relative to recent years, was likely to temper gold demand to some degree.
The PMEAC suggests attractiveness of other financial products be raised to reduce the appetite for gold.