Easing inflation and a revival in sock markets could dent gold imports, pushing shipments down by about 35% in value terms in 2012-13, a government panel said on Wednesday.
Investors found gold a better avenue than stocks and an effective tool to hedge against inflation in the current fiscal year when imports are estimated to reach $58 billion.
The government hopes gold imports will be $38 billion in the full 2012-13 fiscal year.
"The stabilisation of basic macroeconomic conditions at home is expected to curtail the demand for imported gold to be held as an asset by Indian households," C Rangarajan, chairman of Prime Minister Manmohan Singh's economic advisory council said, presenting the panel's report on the Indian economy.
The country imported 969 tonnes of gold in 2011, almost the same amount as in the previous year, as volatile prices dented demand. Shipments will remain flat this year, the World Gold Council said.
Gold in rupee prices gained about 37% in 2011. In comparison, the stock market tumbled almost a quarter during the same period.
Analysts say heavy gold imports have contributed the most to the spike in India's current account deficit, which is likely to be 3.6% of gross domestic product in 2011-12, compared with 2.7% in 2010-11.
Higher gold imports meant the country spent more US dollars, increasing the total import bill and widening the current account deficit.
Gold imports alone contributed nearly 40 basis points in the 130 basis points widening of India's current account deficit between fiscal year 2008 and fiscal year 2011, research house Macquarie said in late November.
A demand for dollars also weakened the rupee by nearly 16% in 2011. The restricted currency has since rebounded. India's headline inflation has eased to 6.55% in January, the lowest level in more than two years.
"The import of gold is because of high rate of inflation and unattractiveness of returns on the financial assets. We should act on that," Rangarajan said.
The government should aim at bringing down the current account deficit to 2 to 2.5% of GDP, Rangarajan said.
The government has already moved to discourage gold imports.
It increased import duty on gold to 2% of value from the earlier flat Rs 300 per 10 grams, and that of silver to 6% of value from the earlier Rs 1,500 per kg.
The government appears less interested in the slightly higher revenue the move would generate than in lower imports.
But Rangarajan ruled out any restrictions on imports, given the country's traditional love for the yellow metal. A ban would also encourage smuggling, he said.
As a way of limiting the appetite for gold, the country should improve domestic growth and investment conditions which will make other financial instruments attractive, he said.
"Going ahead I believe the inflation rate will come down, and if the rate of returns on financial asssets becomes attractive then we might be able to reduce the import of gold," he added.
