In India, 'investment in gold is like social security'
By Pratik Parija
Tuesday, December 11, 2012
NEW DELHI -- India, the world's largest bullion buyer, should mobilize idle gold lying with its citizens to curb imports and lower a record current-account deficit, according to the All India Gems & Jewellery Trade Federation.
Households including temples carry about 25,000 metric tons and a successful plan to gather at least 10 percent of the gold reserves for lending to jewelers will ensure supplies for three years, Bachhraj Bamalwa, chairman of the federation, which represents about 300,000 jewelers, said in a phone interview. The plan should be run by the central bank, which can help India halt imports for three years, he said.
India is grappling with the highest ever current-account deficit, the broadest measure of trade, mainly because of its gold and crude oil imports, weakening the rupee to a record against the U.S. dollar. The central bank is mulling a gold investment plan to curb the deficit, Deputy Governor Subir Gokarn said last month. Imports climbed to a record 969 tons last year, according to the World Gold Council.
"The only way India can reduce its dependence on imports is to tap the gold lying with individuals and temples," Kishore Narne, head of commodity and currency at Motilal Oswal Commodity Broker Pvt., said in a phone interview. "By doing this the country can reduce influx of gold at these high prices. Appetite for gold is never going to diminish."
Imports more than doubled in three years through 2011 as the economy grew an average 7.8 percent in the past decade, boosting disposable incomes and spending on ornaments, cars, televisions, and fridges. Investment demand for gold has climbed almost fivefold to 366 tons in the same period as a rally for 12 straight years boosted bullion's appeal as a store of value.
India's current-account deficit widened to a record $21.8 billion in the quarter through March and was $16.6 billion in the three months through June, official data show. That has weakened the rupee 2.4 percent this year to 54.3450 per dollar after an almost 16 percent plunge in 2011. A weaker currency raises import costs and fuels inflation in a country that meets more than 80 percent of its oil requirements from overseas and is the world's biggest user of gold.
Bullion for immediate delivery fell 0.2 percent to $1,709.40 an ounce at 3:11 p.m. in Mumbai yesterday. The contract for delivery in February dropped 0.3 percent to 31,385 rupees ($578) per 10 grams on the Multi Commodity Exchange of India Ltd. yesterday. The most-active contract climbed to a record 32,464 rupees on Nov. 26.
India can cut imports by offering investment plans that offer returns equivalent to gold, extend tax incentives, easy liquidity and redemption in physical gold through tie-ups with banks and jewelers, said Nilesh Shah, president for corporate banking at Axis Bank Ltd.
"The benefits of lower gold imports will be reflected by way of a stronger rupee, lower interest rates, higher liquidity, higher investments, higher employment generation, higher growth, higher tax collection, lower trade and fiscal deficits, higher credit rating, and lower poverty levels," Shah said in a note.
Gold imports account for 80 percent of the current-account deficit, the central bank's Gokarn said Nov. 25. The monetary authority last month issued guidelines prohibiting commercial banks from lending funds for purchases of gold, other than for jewelers' working capital needs.
The objective of any investment plan should be to put the idle gold into productive use and provide people an opportunity to earn interest income on their holdings, said Prithviraj Kothari, a former president of the Bombay Bullion Association.
India has eased restrictions on the metal in the past decade to stop it being smuggled into the country. A plan to allow banks accept gold deposits against bonds that pay interest in 1999 failed to attract investors. In November 2003 a 4-decade-old ban on futures trading in gold was ended. The import duty was doubled to 4 percent this year to check the surge in imports.
"The only way to reduce gold imports is to increase the import tariff and one can hope that demand then goes down," said Madan Sabnavis, chief economist with Credit Analysis & Research Ltd.
India's official gold stockpiles are estimated at 557.7 tons, compared with world reserves of 31,491 tons, according to the gold council. The Reserve Bank of India held $27.8 billion worth of gold, or 9.4 percent of its $294.51 billion of foreign exchange reserves, as of Nov. 30.
"Even if the depositors bring in unaccounted gold, the government should not ask them about the source," the federation's Bamalwa said. "Indians will continue spending on gold for marriages and festivals. In a country like India, there is no scheme for social security, and investment in gold is like a social security."
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