Gold price first touched four figures in October 2009 at an average of $1,040 for one troy ounce (about 31.1 gm). It kept on soaring - peaking at $1,813.5 in August 2011, as per the World Gold Council. However, gold price has since been falling, barring some minor temporary upward movements in the international market. The significant price correction goes in favour of gold loving Indians.
According to a recent report, the Indian women hold more gold than the US treasury. Indians' love for the yellow metal only adds credibility to the report.
Given the craving for gold Indians have, it would remain in demand even if the government bans its import. That will only encourage smuggling, which has been going on for decades.
Value wise, gold happens to be the most imported item after crude oil, as both jointly skew Indian foreign trade against the overall exports from the country.
The rapidly widening current account deficit (CAD) forced the previous UPA regime to take some harsh measures to contain it, which included sharp increase in import duty on the yellow metal. It was, however, still a wise move to hike the duty rather than impose a blanket ban on gold import.
Here's why import of gold should not be banned:
1. Social value of gold
Owning gold has been considered as a status symbol of Indians for ages. People buy it on certain festivals and other auspicious occasions. It is also considered as the best financial security given the ease of its liquidity.
2. Rise in smuggling
Since gold is so valuable to Indians, it will be really difficult to persuade them not to buy it. It will only aid to illegal trade of the commodity. It is better to hike the custom duty, if it becomes inevitable, than impose a blanket ban on its import. Otherwise, we might see new generations of Haji Mastans and Dawood Ibrahims coming up to fill the demand-supply gap.
3. Pressure on jewellery industry
A good portion of imported gold is processed and exported to various countries to cater to the demand for Indian jewelleries. In fact, the gems and jewellery industry contributes around 15 per cent to the country's overall exports. However, a limited or non-availability of the precious metal will throw a huge challenge to the jewellers for fulfilling demands in overseas as well as domestic market. The ban would destroy the thriving jewellery business, which provides jobs to millions of people.
4. Impact on foreign trade
Ban on import of a certain item might lead to the export of others from India as it is likely to invite some retaliatory action. The step might draw criticism of international bodies like World Trade Organisation and India could be seen as an unfavourable destination for investors.
5. Stabilising gold price
According to the World Gold Council, from the peak of $1813.5 in August 2011, price of gold has fallen significantly to $1260.25 per troy ounce at the end of January 2015. The significant price correction gives the government no reason to ban the import of gold.
6. Improving forex reserve and CAD
The Economic Survey 2014-15 expects the current account deficit to fall below 1 per cent in the coming fiscal on the back of easing prices of some commodities, including crude oil and gold, from the peak of 6.7 per cent of GDP in the third quarter of 2012-13. India also has fairly high reserve of foreign exchange, which has steadily been on the rise over the years. So, for now, the condition does not justify a ban on import of gold.
Instead, it was only prudent on part of the current NDA government to come out with its innovative ideas to extract the massive gold reserve, estimated to be more than 20,000 tonne within India. The government's gold monetisation scheme is expected to allow recycling of the metal lying idle in bank lockers, chests of rich temples and individuals' vaults.
If implemented properly, the gold monetisation scheme, coupled with the launch of gold accounts, might prove to be a better way to curb import than the last government's decision to hike import duty.
Though Finance Minister Arun Jaitley decided to keep the custom duty at record high in his first full-fledged Union Budget, his proposed amendments should see a drop in import of the precious metal and allow him to reasonably lower the duty in future.
