First I'll explain as to what exactly Current Account Deficit or CAD really is. Current Account Deficit happens when your export income isn't able to match your import liabilities. It happens when you earn dollars less than what you spend. Since, international trade happens in dollar denominations, earning dollars is primarily important which also reflects upon the strength of an economy.
Now, the question arises: Why're we earning less dollars? Its because global demand is lull post recession periods of 2009 and our export sector, whether its a manufacturing or services sector, isn't able to gather much business growth. Also, we're facing increased competition from other developing nations in terms of capturing demand at lower prices.
Now, the second comes up: Why're we spending more dollars? We have been historically reliant upon imports of oil for our energy needs. Now, we have also started importing coal too. The biggest import bill comes from energy needs only which is understandable & necessary too.
Now the question shoots: What the sudden fuss then, since its been like this for ages and we have managed it? The answer is there is one more thing that has added greatly to our import bills. That's the shining, glittering yellow metal called GOLD which is the envy of neighbours and owners' pride.
Indian population is infatuated with this yellow metal. It has got an unlimited appetite for Gold. We all know that gold isn't found in India. We have to import it. And when we import it, we have to pay in dollars. Recently, demand of gold as an asset boomeranged post recession after stock market collapses throughout the world. Also, government and investment advisors also promoted it as an excellent bet against inflation and Gold futures and Exchange Traded Funds (ETFs) spruced up all over the capital markets. Gold started being used a guarantee against loans and gold loan companies came over the horizon, such as Muthoot Gold Finance Company and Manappuram Finance Ltd. These events led to a rally or spurt in the prices of Gold, both nationally & internationally, which led to greed. More and more money started pouring into this yellow commodity. Everybody wished to buy or invest in gold either physically or in form of derivatives or ETFs which led to the opening of floodgates of demand of this shiny metal.....
And then suddenly, government found itself short of dollars to pay for that gold. Such is the extent of shortage that our foreign exchange reserves (excluding gold) is now around 65% of the total outstanding debt. The country can't cover its liabilities today if its asked to do suddenly in terms of money. So, the Ministry of Finance in consultation with Reserve Bank of India passed out strictures to trading institutions to curb down gold imports and fixed a quota to it. Guidelines have been passed to banks to decrease their gold imports and holdings. Strictures over gold loans is also being contemplated. Yesterday, the Finance Minister suggested the public of India to dissuade from buying gold. He's talking about self-restrictions on the part of government from buying gold for a year. And, suddenly the gold has lost its glitter.....
Recently, the Government Of India introduced "inflation bonds" and invited public participation into that bond. This bond is very well meant to suck up the excessive liquidity in the hands of the public by promising them returns adjusted for inflation which would have otherwise gone into gold, since the common man can think of nothing else. The money collected through such a process can easily be put to use to other productive functions of the economy, like infrastructure, education, healthcare etc, while gold, as an asset, would have stayed idle being adorned on the napes or in the safe boxes of bedrooms and banks.
Now, since the government has started taking a stand against gold imports and India is one of the topmost consumers of the gold in the world, a lackadaisical demand from India is going to wring heavily on gold as an asset internationally. The gold prices can fall internationally in anticipation of weakened demand from India. Also, a couple of years ago, Reserve Bank of India (RBI) bought up around 400 tonnes of gold. In order to bring in order the CAD, if the RBI sells the gold reserves in international markets, international gold prices will be in for a rude shock and it can go down sharply. Since, domestic gold markets follow international prices, the savings of common men in form of gold will also get battered down.
Has the gold lost its sheen?
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