Indian Economy and the curse of Gold
The Indian economy grew at around 5% for the fiscal year ending March 31, 2013, down from 6.2% the previous year. With economic growth slowing for nearly three years now and the economy expected to grow at around 4.8% this year, the slump is attributed to several persistent structural issues – prominent amongst which a widening Current Account Deficit (CAD). To quote the RBI governor, "The biggest risk to the economy stems from the CAD."
CAD represents the difference between India's imports of goods and services and its exports plus remittances by Indians living abroad. During 2012-13, CAD stood at USD 87.8 billion (4.8 per cent of GDP) as against USD 78.2 billion (4.2 per cent of GDP) during 2011-12, much above the RBI’s comfort level of 2.5%. The current account deficit reached a record high of 6.7% of GDP in the last quarter and coupled with a high inflation environment, it really restricts the Central Bank’s scope to manoeuvre its monetary policy effectively.
The excess of imports over exports of goods i.e. the trade deficit, is a major component of the CAD, and is usually covered by foreign investors bringing money into India or by dipping into the country's forex reserves. Gold and Oil imports account for almost 70% of India’s trade deficit. The yellow metal was the second-largest commodity in India’s import basket at $53.8 billion in 2012-13, after crude oil imports at $169.3 billion in the same year. Oil imports are necessary, Gold imports aren’t.
India is the world's largest single consumer of gold, as Indians buy about 25% of the world's gold, purchasing approximately 800 tonnes of gold every year, mostly for jewellery. India is also the largest importer of gold. As the biggest importer and consumer of Gold in the world, it is interesting to decipher the reasons behind the country’s insatiable demand for the yellow metal. The attraction towards gold is deeply embedded in the psyche of an average Indian....
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