Goldhater: Can India Fix Its Current Account Deficit?

♠ Posted by Emmanuel in , at 1/31/2014 10:28:00 AM
First came the James Bond film Goldfinger, then came the spoof movie Goldmember. Now we have the threequel...Goldhater. It is generally well-known that India is a major if not the #1 market for the precious metal since many cultural traditions are based on it--especially as gifts. However, the substantial rise in gold prices in the past decade or so has served to increase India's current account deficit. How to control rises in the deficit, then? India has been busy slapping one tax on gold after another:
India will not revise its record high import duty on gold and other restrictions on imports until the nation's current account deficit is firmly under control, Finance Minister P Chidambaram said in Davos on 23 January. India has a record high 10% import duty on gold and a rule that says 20% of all bullion imports must exit the country as exports.

The subcontinent used to be the world's largest consumer of the precious metal until the government made three upward revisions to the import taxes on gold, to reign in a record current account deficit (CAD). The country's CAD could hover below the $50bn mark in the year to 31 March, 2014, a $20bn reduction from previous estimates.
In the longer term, officials indicate that changing consumption patterns of gold will be affected less by government fiat and more by cultural changes away from prioritizing exchanges of the precious metal. According to RBI Deputy Governor K C Chakrabarty::
Speaking at a panel discussion on Gold and its status in India - at IIMB, he said gold intoxication [don't you just love that term?] is prevalent only to India, and society as a whole must work together to change mindsets.

"Stop giving or taking gold as dowry and stop giving gold to temples," he advised. Maintaining that RBI has never stopped import of gold, he said: "Do not borrow money from banks to import gold." "Consumer has never benefitted from gold and gold has given a negative return world-wide, it is not an investment but a speculation," he added.
To be sure, the Congress Party has an eye on winning the next elections too, and all of these restrictions of gold imports may partly be responsible for its current unpopularity. Will Congress Party leaders loosen restrictions, then? They at least claim to be sticking to their guns:
Answering a query about an earlier media report that Sonia Gandhi, the leader of the ruling Congress party, had written to the Indian government asking for gold import restrictions to be relaxed, Chidambaram said he had not read the letter.
"Until we have a firm grip on the current account deficit I do not contemplate any roll back in any measure. We will have a full idea of the current account deficit only when the budget is presented and when the year comes to an end," Chidambaram told CNBC TV18 in Davos.
We'll see...