Can India Find out Best Solution to Curb CAD?

Gold-CADGold crazy Indian consumers have been watching these days a tough tug-of-war between domestic jewellery industry and the government.

As we have mentioned in some of our Blogposts here that gold is on No. 2 position after crude oil for which the Indian government has to pay heavily in terms of foreign exchange for its import. This has led to widening of India’s Current Account Deficit (CAD). Oil being a necessity, the government has to import it at any cost but gold is not a necessity. On the contrary, it is an ‘unproductive’ commodity, so the government has introduced stringent and restrictive measures on the yellow metal’s import before a year or so.

The measures (we have already discussed about them earlier) certainly brought some solace to the government which was able to control the CAD to a desirable level. But the industry people were certainly not happy with the ‘destructive’ measures as they (measures) drastically brought down the gold imports which activated smuggling and rendered thousands of artisans jobless. So the government was happy but not the industry people.

But the situation has now turned in favour of the industry after it had a good Diwali and festive season jewellery sales which were up by 15% to 20% in various parts of India in comparison with 2013. According to World Gold Council (WGC), jewellery demand in India saw a 60% year-on-year increase to 183 tonnes during the third quarter of 2014. According to the latest figures, India’s October 2014 imports of gold have reached to 148 tons which indicate six-fold increase from less than 25 tons in the same month of 2013. Imports in the September quarter were up by 39%.

This has once again disturbed the government greatly. Top officials of India’s Finance Ministry and the Reserve Bank (RBI) had met recently to consider tightening import controls on gold. But the meeting has remained inconclusive and they have agreed to meet again in a few days to take a decision, official sources say.

Industry leaders on the other hand are once again preparing to oppose strongly any move by the government to introduce more curbs on the gold imports. All India Gems & Jewellery Trade Federation (GJF), the apex body of jewellery retailers feels any further curbs would spell doom for India’s gem and jewellery sector.

Chairman of the GJF Mr. Harish Soni says, “The recent increase in gold imports may seem very high because the base of gold imports in September-October 2013 was low, but this comparison cannot be used to impose further curbs. The high import was stimulated by advance buying prior to festive season and anticipation of new restrictions on gold imports as indicated by the government.”

Mr. Prithviraj Kothari, Executive Director of India Bullion & Jewellers Association (IBJA) says, “The government should find out other options to control the CAD. Gold today has become more a currency than a commodity and increasing the (import) duty would only encourage smuggling and new curbs would further impact availability. I feel the government should encourage Gold deposit scheme.”

Mr. Vipul Shah, Chairman, Gem & Jewellery Export Promotion Council (GJEPC) remains neutral as long as exporters are not disturbed. “The government is no doubt keen to curb domestic consumption,” he adds.

But if the government is determined to control the widening CAD, it would surely introduce some measures soon which may once again prove to be ‘unfavorable’ for the industry.

Posted by Suresh Chotai