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IMPACT OF GOLD PRICES ON INDIA’S BALANCE OF PAYMENT

Gold has a deep rooted significance in Indian history, alluring people from different parts of the world with its beauty and charm. Over the years India’s infatuation with gold has grown stronger and stronger, with Indians accounting for most of the gold consumed globally. According to some estimates, India has a stock of about 23,000-24,000 tones of gold which is mostly held by households.

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Impact of Gold on the Economy : BACKGROUND:- Gold impacts the Indian economy in multiple ways. The first impact is on the scale of economic activity in the economy. Gold is used as a raw material  for jewellery fabrication and making coins. This in turn creates business opportunities, value ad dition and employment. A study by A.T. Kearney with reference to the year 2012-13 mentions that value addition in the sector is to the tune of 25 percent of the value of gold imported into the country1 . This includes value addition in jewellery manufacturing, retailing and exports and metals trading. In addition, the industry value-chain has a potential capacity for refining and mining, which can further generate jobs in the rural areas. The second way, which is the conventional way of looking at gold, is the impact of gold  imports on trade balance and current account in the Balance of Payments . India has consistently been experiencing Current Account Deficit. High levels of deficit are considered detrimental to the economy since it would necessitate capital flows to maintain the Balance of payment which can be volatile in nature.

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However, since gold imports are also  used for export of gold jewellery, it has the potential to mitigate the adverse impact of imports on Current Account Deficit. The policy position in India vis-à-vis gold in the recent years has focussed on gold imports and Current Account Deficit. The period since 2007-08 saw a sharp increase in the price of gold as well as in the demand for gold from India as well as from the rest of the world, partly perhaps in response to the international financial crisis. This in turn led to the widening of the Current Account Deficit in India which the Government sought to control by increasing the customs duty to 10 percent. While the immediate impact was a reduction in gold imports through official channels, it increased the quantity of unofficial imports into the country and adversely affected domestic jewellery industry. It is therefore time to take a balanced view of the domestic gold eco-system whereby the focus is on creating an organized gold sector, that is integrated both with reference to the multiple regulators and also with reference to the scattered market place, while addressing the impact of net imports on Current Account Deficit. Therefore, the Committee is in favour of a gold policy which would boost the supply ecosystem, translate demand into productive investment and  make   the industry world class.

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CURRENT POSITION :- Reflecting  the rise in economic momentum, India's current account balance showed a deficit of one per cent of GDP ($8.1 billion) in the fourth quarter ended March 2021 ( Quarter FY21 ). The current account was in surplus at 0.1 per cent ($0.6 billion) in the fourth quarter of last year ( Quarter FY20 ). The current account  deficit (CAD ) was 0.3 per cent of Gross Domestic Product ($2.2 billion) in the third quarter of  FY21. For the full year FY21, the balance recorded a surplus of 0.9 per cent of GDP as against  a deficit of 0.9 per cent in FY20, according  to a data of  Reserve  Bank of  India.

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Aditi Nayar, a Chief Economist, of   Investment Information and Credit Rating Agency of India Limited  said that a normalization in import demand as well as a surge in gold imports   contributed to the widening of the CAD in fourth quarter of FY21 from $1.7 billion in the previous quarter, in spite of the massive increase  in  exports in March 2021. The current account deficit  in fourth quarter of FY21  was primarily on account of a higher trade deficit and lower net invisible receipts than in the corresponding period of the previous year. The private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $20.9 billion in  fourth quarter of FY21 , up by 1.7 per cent from their level a year ago,  Reserve Bank of India  said .

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Rahul Bajoria, Chief India Economist of Barclays, said with activity continuing to normalize and higher commodity prices, the current account deficit is likely to widen in the coming quarters. In the current fiscal year (FY22), India's current account deficit is expected to be $35 billion (1.1 per cent of GDP), although robust capital flows will ensure a Balance of Payment surplus of $50 billion, he added. On Balance of Payments basis , there was an accretion of $3.4 billion to the foreign exchange reserves  in fourth quarter of FY21  as against an accretion of $18.8 billion in  fourth quarter of FY20. RBI said in a statement, In year 2020-21, there was an accretion of $87.3 billion to foreign exchange reserves (on a Balance of paymet basis ).

IMPACT OF GOLD PRICES ON INDIA'S BALANCE OF PAYMENT

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