Gold import must be curbed
Proloy Bagchi It is rather strange that Finance Minister P Chidambaram has to beseech people not to buy gold for at least one year in view of the...
It is rather strange that Finance Minister P Chidambaram has to beseech people not to buy gold for at least one year in view of the mounting current account deficits. But his request does not apply to those who have a penchant for hoarding their wealth in gold. According to a media report, leaders cutting across party lines have accumulated gold worth crores.
Notwithstanding the actions of his colleagues, the Finance Minister underscored that the rising demand for the precious metal is met increasingly by imports which push up the trade deficit, impacting balance of payments. The consequential mounting current account deficit is causing scarcity of dollars, weakening the rupee. Lately, the rupee has lost heavily against the dollar and is now pegged close to 60 to a dollar.
Reportedly around 95% of the requirement of gold is imported. In May alone 162 tonnes of gold was reported to have been imported. Gold is only next to crude oil for the import of which billions of dollars are expended annually. With economic slowdown in Europe and elsewhere, our exports are slack, unable to match the outgo of dollars for imports. Dollars have thus become scarce, seriously affecting the value of the rupee. If this situation persists, prices of all consumables are likely to rise, adding to the prevailing high rate of inflation. Apart from a few millions sinking into poverty a fear has been expressed that we may face a 1991-like situation when we had to mortgage away our gold.
But appeals are not enough. Our people are largely indifferent to all that happens around them. It wouldn't be too much to say that they are basically self-centered in most respects, more so in respect of securing their lives and those of their dependents against emergencies. Renunciation cannot be expected from them in this respect, particularly when they see leaders and their relatives filling their own coffers by corrupt means regardless of the country's difficult economic situation.
Gold has traditionally been considered an ideal form of security against financial emergencies. The stock market see-saws frequently, causing enormous losses to investors; investing in real estate is full of risks and hassles and returns on deposits don't beat the prevailing inflation rate. Investment in gold, however, is not only risk-free but also hassle-free. It can be bought right off the bazaar. Middle and upper classes, therefore, load their daughters with gold while marrying them off, a tradition that has, of late, been effectively egged on by the daily TV soap operas where women of the house are shown all the time laden with gold ornaments from head to toe.
Even the corrupt involved in cases of astronomical sums of money find gold convenient for salting away their ill-gotten pickings. No wonder that whenever law- enforcement authorities choose to raid the corrupt, they come across tonnes of gold in the shape of bricks and ornaments. For them gold is easier to exchange for goods and services as also to conceal. Very few have been daring enough to flaunt their ill-gotten gold in the shape of furniture, cutlery, golden coronets for their deity and so on like the Reddy brothers of the "Republic of Bellary".
Gold, therefore, is something which is precious and continues to be chased by all. Its demand is highly unlikely to wane at any time soon unless restrictions are placed directly or indirectly for its acquisition. The Government has tried to curb demand recently by increasing the import tax on it to 6%. In the context of the escalating unsustainability of the current account deficit it was a feeble attempt. If import of oil and gold is the villain, it is the latter that needs to be up against the axe.
Oil imports cannot be curbed for obvious reasons. Gold import can be restricted, if not by a ban, at least by hiking the import tax which, experts say, should be raised to at least 20% to make it effective. Its price may go through the roof, giving smugglers a field day. If criminality gets promoted, so be it. At least the economy would be safe. Smuggling, however, is something that the Government can always clamp down upon with stricter vigilance.
Likewise, the Finance Minister recently opined that there was no need to panic over the falling rupee. He may not feel panicky and also claim that the economy is stronger than it was this time last year. Regardless of what he says, a weak rupee affects people in myriad ways, most important of which is the rise in prices, especially of fuel. Oil marketing companies recently raised the price of petrol by Rs. 2 and hikes in prices of diesel and LPG may not be far away. When that happens, it will have a cascading effect on most commodities.
Besides, in a globalised economy the cost of everything that has an import-content will go up. Already the manufacturers of consumer goods and electronics have threatened to pass on the excess costs of imports to consumers. Ministers and leaders need hardly panic over it as most of them are billionaires and have adequate cushion to tide over such minor contingencies; it is the people at the lower economic strata, who make an honest living, who will face the music.
To meet the mounting trade deficit the Government, apart from curbing gold demand, would also need to look out for opportunities for increasing exports not only by diversifying the product range but also by exploring possibilities of markets in countries that are not traditional importers of Indian products. Our export earnings need to match the mounting costs of imports; or else we are likely to become an economic basket case.
Vigour has to be brought back into manufacturing and infrastructure spruced up. Action is, reportedly, now being initiated to "unlock" investments in projects amounting to a mind-boggling Rs. 7 lakh crore (700 thousand billion). Some of these are World Bank funded and others relate to infrastructure that have been languishing for want of clearances at the Central and State levels. The PM directed their fast-tracking and ordered constitution of a monitoring group within the Cabinet Secretariat to monitor them.
To a layman, it appears to be a little shameful that the Government has decided now to start monitoring progress of approved projects when things seemingly are at a crunch. This should have been happening all along. While visiting Malaysia under the Advanced Professional Programme on Public Administration conducted by the IIPA way back in 1981, we were told by a representative of the Malaysian Government that all projects of more than 100,000 dollars (the then Malaysian currency unit) were being monitored by the Prime Minister. Why have we been so sluggish in doing what others have been doing for decades?