Gold import bill may touch $100 bn by 2015-16

Confidence in Western currencies is close to evaporation point. What now? Even clip-art is handing out images of currency turmoil. End is near.

Confidence in Western currencies is close to evaporation point. What now? | Cartoon source & courtesy - cartoonstock.com. Other credits embedded in image. | Click for source image.

Dollar squeeze

Hit by a global dollar-liquidity squeeze, the Indian rupee plummeted against the dollar in December 2011.

Result.

Between September 2011-December 2011, gold prices declined by nearly 21% (from US$1950 /oz. to US$1550 /oz.) in dollar terms. But, in India, gold prices showed a decline of less than 7% (from INR 29,000 to INR 27,000).

A worried Indian government tied up a US$15 billion credit facility with dollar-surplus Japan – and increased customs duty on gold imports.

Gold import bill is expected to touch $100 billion by 2015-16 against $33.8 billion in 2010-11, industry body Assocham said in a report.”Calculated on the basis of CAGR of period 2010-11 over 1999-2000, the gold import bill could total $100 billion by 2015-16,” it said in the report released today.

According to RBI, the current account deficit is a cause of concern because of inelastic gold and oil demand, it said.With the government increasing import and excise duties on gold and silver, both commodities are set to cost more.

Being the largest importer of gold in the world, India accounts for nearly one-third of the annual demand with import bill rising from $4.1 billion in 2001-02 to $33.8 billion in 2010-11, it said. (via Gold import bill may touch $100 bn by 2015-16 – The Economic Times).

This seems too smooth. Will it remain so 'orderly'. What when mayhem and chaos breaks out? | Image source and courtesy - businessinsider.com | Click for a larger source image.

Bad ideas – recycled

The biggest problem with trying out tariff barriers against gold import in India is smuggling.

Between 1935-1995, a sixty year crime wave engulfed the world. Mafia was seen as a global power center – undermining societies and the State.

This crime wave was fueled by an explosive mix of drugs carriage by the Indian underworld to the West and gold smuggling into India.

Within a few years after customs duty on gold imports was brought down, the Mumbai underworld became powerless.

The British used the same logic to stop gold imports into India. Morarji Desai, recipient of an alleged CIA payoffs, resisted all attempts to relax gold imports and trade in India.

Even clipart is handing out images of currency turmoil. End is near. | Clipart source and courtesy - clipartof.com | Click for source image.

Shaky base

The logic used by all these regimes was the same – gold imports are a drain on the Indian economy.

In fact it is the other way around.

With the dollar and the Euro close to collapse, gold will assume a greater monetary role in the next 10-30 years.

India with the largest reserves of gold in the world, will no longer be dependent on Western capital for growth.

And that is what a section of the Indian government is thinking of!

India’s infrastructure companies may be allowed to offer tax-free gold bonds aimed at channelizing household savings to the cash-starved sector that is estimated to need $1 trillion (about Rs 50 lakh crore) over the next five years.

A senior official told the HT that the government is actively considering a set of proposals aimed at converting a portion of stocked-up gold and also new stocks of the metal flowing in to help the nation build highways, ports and other infrastructure.

“The objective is to induce fresh investment and convert existing gold holdings into investible bonds,” said the official.

The proposals, which are likely to be announced in the budget for 2012-13, include allowing infrastructure companies to issue five-year bonds with a unique structure. The capital investment will be protected, over and above which there will be an interest yield. The bonds may also carry the option being redeemed as physical gold.

Investment in such bonds will be eligible for tax breaks similar to those offered by bonds of infrastructure firms such as National Highways Authority of India, the official said.

India is the world’s bigget (sic) importer of gold, which is considered a strong collateral for cheap loans. Households use gold as a key parking avenue for their savings, often as jewellery.

“The annual pool of financial savings can potentially rise to $800 billion by 2020 and unlocking investments in non-productive assets into financial assets such as infrastructure bonds will be critical to exploit the pool of savings,” the official said. (via Govt mulls gold bonds for infra – Hindustan Times).

What gives

India’s traditional exports are good enough for all the gold imports that we need. Where are these ideas of ‘gold as a burden’ coming from.

Was ‘international advice’ behind Indian Government’s decision to increase customs duty on gold?

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