INDIAS GOLD IMPORTS :

Its Impact and

Sustainability
BY :-
ic!"y M"#$iya
%&S'MA()
*+nt"nts
i. Introduction
ii. Evolution of Gold Policy
iii. How big are Indias Gold Imports
iv. High Levels of Gold Imports, Is it
ustainable!!
v. Issue
vi. "onclusion and Possible #ay
$ut
I. Introduction

India imports most of its gold

re%uirement.

Gold as a commodity on its own does not

add much to the productive capacity of
the economy.

&he foreign e'change reserve that is

used to import gold reduces the
availability of this resource to (nance the
import of other commodities.
India accounts for nearly one-third of the
total world demand for gold.
II, '-+luti+n +. G+ld P+licy
Pre Liberalization
). *fter independence, the government chose
to severely restrict gold imports to prevent
the diversion of savings away from
productive assets. +oreign E'change
,egulation *ct, )-./.
0. &hough the initial ban was rela'ed, controls
were enshrined in law by the Gold "ontrol
*ct, )-12.
3. &he Gold "ontrol *ct was dispensed away
with in the early -4s in order to further the
agenda of trade reforms.
B. Post Liberalization
). *fter the removal of this act , gold imports
increased in huge amounts . I have ta5en the period
from 044)640 to 04)36). and e'amined the trends in
gold imports in India .
0. &he special focus is on the period between 04426
044- and 04)0 which happens to be the post global
(nancial crisis period in which gold imports have
increased considerably . I have analy7ed the reasons
for the increasing curativeness of gold.
3. &his rise in gold imports has made the e'ternal
sector of the Indian economy unsustainable . o, I end
with some demand and supply side measures which
can be ta5en to restrict the rise in gold imports.
III, /+0 Bi1 a$"
Indias G+ld Imp+$ts2
&,E89 I8 G$L9 I:P$,& 044)640
&$ 04)36).
Gold Imports from 044)6
04).
4
0
.
1
2
)4
)0
).
S#a$" +. 1+ld imp+$ts in t+tal imp+$ts
share of gold imports in total imports
3
8et Imports of Gold
6)44444
624444
614444
6.4444
604444
4
04444
.4444
*u$$"nt Acc+unt Balanc"

8ear6perfect correlation between
gold imports and current account
de(cit
Gold and "urrent *ccount 9e(cit
634
604
6)4
4
)4
04
34
.4
;4
14
G$+0t# +. 1+ld d"mand .$+m India 4536
Growth of gold demand from india
+inancial savings have been falling
relative to G9P as gold imports
have been rising relative to G9P
1998 2000 2002 2004 2006 2008 2010 2012
0.08
0.09
0.1
0.11
0.12
0.13
0
0.01
0.01
0.02
0.02
0.03
0.03
0.04
HH savings as a share of GDP Gold imports as a share of GDP
H
H

S
a
v
i
n
g
s

a
s

a

S
h
a
r
e

o
f

G
D
P
G
o
l
d

m
p
o
r
t
s


a
s

a

S
h
a
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e

o
f

G
D
P
Sources: IMF International Financial Statistics, Reserve Bank of India, UN Comtrade
&he irony <
*+unt$y P"$ *apita Inc+m" D"mand 7+$ G+ld
=* .2104> 0). tones
"HI8* .-.4> //4 tones
I89I* ).)4 > )4;- tones
ource ? #orld Gold "ouncil ,eport

Indian consumer demand for gold is 37.6 per

cent more than that of China.

Whereas in terms of GDP India!s GDP is "ust

#7.7 percent of China and a meagre $$.%
percent of &'(.

India!s fore) reser*es are +.+$ percent of

China!s fore) reser*es yet its gold demand
is more than that of China ,y 37.6 percent.

India!s gold imports were higher than the

twel*e states G'DP in the year #%$3-$-.

Gold import *alue for the year #%$3-$- was

higher than the ,udget estimated
e)penditure on &r,an De*elopment
.ousing /amily Welfare for the year #%$3-
$-.
I, /i1# L"-"ls +. G+ld
Imp+$ts8 Is it Sustainabl"22

*t these levels, Indias Gold imports

would be huge burden on the balance of
payment

creates unsustainable pressure on

current account.

$n the other hand, this represents a

massive stain in the countries investable
resources.

#eaning away domestic savings from

Gold investment would assume
important from this prospective
9#y #as 1+ld b"c+m" suc# a
luc$ati-" ass"t2

Gold price movement

In@ation and interest rates ? Gold

has always been considered a
good hedge against in@ation

"urrency @uctuation

Geo6political concerns

"entral ban5 demand

ome :ore ,easons

High degree of li%uidity which

has been enhanced due to
Aloans against gold schemesB
oCered by ban5s and 8D+"s.

"ultural and Institutional factors

8o ta' hassles on gold

transactions.
Increasing Gold Price
Hedge against in@ation
P"$i+d A-"$a1" 9PI
G$+0t#
A-"$a1" G+ld
P$ic" G$+0t#
044)640 3.1. 0...
0440643 3.32 )1.;)
044364. ;..2 /.0.
044.64; 1.;) /.13
044;641 .... )0.)/
*verage of
044)640 to
044;641
..1- -.04
044164/ 1.;- 3;.12
044/642 ../. 2.34
044264- 2.4- 0-.23
044-6)4 3.21 00.1-
04)46)) -.;/ 00.42
*verage of
044164/ to
04)46))
1.;/ 03./0
04))6)0 2.-1 33.;.
,eturns vis6E6vis other assets
=se for re 6e'ports
,ising gold prices and
positive e'pectations
ource ? #orld Gold "ouncil
Low duty structure on
gold imports
&rade liberali7ation that began
in the )--4s reduced
%uantitative restrictions on
gold imports. It was only after
044- that the government
increased the customs duty on
gold imports.
wit7erland is a 5ey import
partner for India
0
200!000
400!000
600!000
800!000
1!000!000
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
"
2
0
0
6
2
0
0
#
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
$%antit& in 'ilograms
(ll other partners S)it*erland
0
10!000
20!000
30!000
40!000
"0!000
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
"
2
0
0
6
2
0
0
#
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
+al%e in ,illions of 2010 -SD
(ll other partners S)it*erland
ndian Gold mports .& Partner
/1!000!000 /800!000 /600!000 /400!000 /200!000 0
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
$%antit& in 'ilograms
S)it*erland (ll other partners
/40!000 /30!000 /20!000 /10!000 0
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
+al%e in ,illions of 2010 -SD
S)it*erland (ll other partners
Partners0 12port of Gold to ndia
3ess ndia0s mport of gold from Partners
&here are large discrepancies in
Indias reported imports of gold
and partners reported e'ports to
India
/1!000!000 /800!000 /600!000 /400!000 /200!000 0
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
$%antit& in 'ilograms
S)it*erland (ll other partners
/40!000 /30!000 /20!000 /10!000 0
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
+al%e in ,illions of 2010 -SD
S)it*erland (ll other partners
Partners0 12port of Gold to ndia
3ess ndia0s mport of gold from Partners
/1!000!000 /800!000 /600!000 /400!000 /200!000 0
2012
2011
2010
2009
2008
200#
2006
200"
2004
2003
2002
2001
2000
1999
$%antit& in 'ilograms
S)it*erland (ll other partners
/40!000 /30!000 /20!000 /10!000 0
2012
2011
2010
2009
2008
200#
2006
200"
2004
2003
2002
2001
2000
1999
+al%e in ,illions of 2010 -SD
S)it*erland (ll other partners
Partners0 12port of Gold to ndia 3ess ndia0s mport of gold from Partners
Partners e'port of gold to India less Indias import of gold from
partners
,easons for Post6crisis
spi5e in gold imports
). ustained increase in gold prices
in India.
0. Price of gold e'hibits counter6
cyclical behavior and pricing is
transparent.
3. Pent up demand for gold.
, Issu"

&he foreign e'change resource that is used

to import gold reduces the availability of this
free e'change to (nance the import of other
commodities.

0ven the ,DI in its review of macroeconomic

situation has said "urrent *ccount 9e(cit is
a cause of concern because of inelastic gold
and oil demand.

,ecently with the government increasing the

import and e'cise duties on gold and silver
means that both these commodities are set
to cost more.

However, loo5ing at the pattern of gold

consumption in India and the numerous
factors that motivate people and institutions
as indicated in the study earlier to see5 gold
investments it seems that Fust raising the
import duties alone will not have the desired
result of bringing down gold demand
GI. "onclusion and
Possible #ay $ut
9emand ,elated
:easures
). +iscal measures to reduce gold
imports
0. *ppropriate documentation of
gold sales and purchases
3. 9esigning innovative (nancial
instruments.
.. Imposition of e'port obligation
on importers.
upply ,elated
:easures
). ,ecycling of domestic gold
0. Introduction of ta' incentives on
instruments that can impound
gold.
3. etting up of a Dullion
"orporation.
Initiati-"s

Inc$"as" t#" $"ac# +. Ban!s

Inn+-ati-" m"ans +. alt"$nat"

in-"stm"nts must b" c+nsid"$"d

Li;uidity ;u+ti"nt +. alt"$nat"

in-"stm"nt inst$um"nts

Massi-" "ducati+n campai1n

must b" launc#"d
Don't Buy Gold for Economy's Sake