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Gold has been the bane of India’s external sector for long now, as imports of the precious metal have risen nearly 115 per cent between 2000-01 and 2012-13. In value terms, gold imports have risen from $4 billion in 2001-02 to $54 billion in 2012-13, which translates into a 14-fold rise over a decade. Indians have always loved gold but over the last few years, this obsession spiralled out of control, taking India’s current account deficit to unsustainable levels.
So when international gold prices fell 16 per cent in April to $1,348, economists rushed to lower their estimates of the current account deficit, as the understanding was that the fall would take away some of the metal’s charm and volumes too would decline. The current account is nothing but the difference between a country’s exports of goods, services and transfers and its imports. Over the last few years, India’s current account has widened substantially and touched 5.7 per cent of GDP in FY13. It touched a record 6.7 per cent of GDP in the third quarter of FY13.
The chairman of the Prime Minister’s Economic Advisory Council C Rangarajan said on April 24 that gold imports would fall 20 per cent in value to $45 billion in FY14, and the current account deficit would narrow as a result of this. However, this has not happened as gold demand is expected to have spiked to 300-400 tonnes in the first quarter, according to the World Gold Council estimates.
While economists were expecting gold demand to slow as prices decline, data suggests otherwise as the fall has only triggered a bigger rush for gold. Neither has the investment demand fallen nor has the demand for jewellery. The World Gold Council anticipates India’s gold imports to be anywhere between 300-400 tonne in the June quarter, a 200 per cent year-on-year increase and a substantial portion of last year’s imports of 1,017 tonne. This has helped gold recover three per cent in May.
Gold analysts say that the fall in gold prices may have weakened investment demand, but consumption demand has bounced back. Sugandha Sachdeva of Religare Commodities believes that investors were lured into buying gold considering it a great bargain. Jewellers and retailers were seen accumulating the yellow metal in April, leading to a tight supply scenario and physical premiums were seen rising to multi-year highs in the market, she adds.
| Gold Import (Tonnes) | ||
| Period | Import in tonnes | % Change |
| Jan-Mar 2011 | 306 | NA |
| Apr-Jun 2011 | 301 | -1.63 |
| Jul-Sept 2011 | 205 | -31.89 |
| Oct-Dec 2011 | 157 | -23.41 |
| Jan-Mar 2012 | 228 | 45.22 |
| Apr-Jun 2012 | 153 | -32.89 |
| Jul-Sept 2012 | 223 | 45.75 |
| Oct-Dec 2012 | 255 | 14.35 |
| Jan-Mar 2013 | 215 | 5.7 |
| *Apr-Jun 2013 | 300+ | 100% |
*WGC estimates
Presuming the rupee averages at last year’s levels, India’s gold import bill would merely decline in value terms by 13 per cent (equivalent to the fall in gold prices) in FY14 so far to near about $50 billion, which is again not sustainable. Consequently, Rao is not expecting the current account deficit to improve dramatically in the current account deficit.
When it comes to gold, the behavior of Indian consumers has defied rules of price elasticity. Till 2008, for every 1 per cent fall in gold prices, demand for gold increased by 60 basis points, but in the first quarter of FY14, it appears that the price elasticity has been higher, which has resulted in the spike in demand, explains Dhananjay Sinha, economist and strategist at Emkay Global. The comfort of lower gold imports following the price decline globally has been overstated, he feels. He believes that contrary to Rangarajan’s estimates of current account deficit falling to 4.5 per cent of GDP, the CAD could be close to 5 per cent of GDP. Sinha expects India’s gold import bill to be in the range $50-55 billion.
A weak rupee could also wreak further havoc with the current account deficit, believe economists. If monsoons are good, then the demand for gold will remain elevated. The central bank seems to be aware of the scenario, which is why it is continuing to tighten norms so that gold imports slow down. If the current account has to be brought down to manageable levels, the government needs to do more than just hope for a fall in demand.
