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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Two Books on the Monetary Horror Story That Looks Like Today’s – NYTimes.com

Hjalmar Schacht (above left) and Sir Montagu Norman (right)

In the 1920s the press had been infatuated with an international foursome of elite bankers who took on the challenge of restoring global economic balance after the wreckage created by World War I. They had been called the “Most Exclusive Club in the World.”

With the angrily Prussian-mannered Hjalmar Schacht of the Reichsbank, the conniving Émile Moreau of the Banque de France and Benjamin Strong of the Federal Reserve Bank of New York as its other principals, and with Winston Churchill, John Maynard Keynes and Franklin D. Roosevelt among its secondary players, “Lords of Finance” tracks the shifting balance of economic power that reflected each country’s self-interested agenda. But one of the book’s most important points is that self-interest, in the world of global economic fluctuations, can be self-defeating. (via Books of The Times – Liaquat Ahamed’s ‘Lords of Finance’ – Monetary Horror Story That Looks Like Today’s – Review – NYTimes.com).

Elephants in the room

Another interesting book which covers a wide area – between the wars. The Western pre-occupation with itself, its total self absorption, at a cost to the rest of the world shows up in this book.

As is usual, it ignores other crucial elements and factors. For instance, how the Indian economy was used to meet Britain’s Post WW1 liabilities. To ‘dampen’ India’ gold demand, the Indian rupee was put on fixed, overvalued rate vis-a-vis the sterling.

Indian exports crashed, imports ballooned. Indian accounts would be settled at ‘official’ silver prices, with inflated silver released by the US under the Pittman Act. Gold prices were deflated – and Indians would therefore receive less for their gold. Thus with with a combination of inflated silver price, deflated gold price, high interest rates and an overvalued Indian rupee, the Indian economy was strangled. None of the book reviews or interview however identify this – unwittingly, or deliberately.

India funded the post WW1 recovery

The mechanics and the development is laid out in a better book, John Bullion’s Empire by By G. Balachandran. This book traces how much of India’s poverty was a result of economic policies between the two World Wars co-ordinated by these four central bankers.

On October 27th, 1931, the Ramsey Macdonald led “National” Government (Conservatives and Liberals coalition, fearful of the rising Labour Party) in Britain won a huge majority of 554 MPs of 615. The economic crisis of September 1931 (misnamed as the Indian Currency Crisis) was a result of this economic policy which reduced Indian economic activity – resulting in bankruptcy of the Colonial India Government.

Parallel Great Depression era problems in the US, the Weimar Republic problems – and other issues pushed this ‘National’ government to ram through a series of measures (page 130-131) that inflated silver prices, depressed gold prices and raised interest rates in India. The Indian rupee was pegged at a high exchange rate vis-a-vis the sterling. Indian exports crashed. To ensure that Indian farmers had no options, Indian money lenders were regulated and licensed into paralysis.

Indians were paid, with inflated and abundant silver stock, instead of gold. This silver was the same silver released by the Pittman Act. The silver buffer solution to the gold drain to India was seen as the “only buffer to protect Western gold reserves against the Indian drain (was) a silver buffer.” Of course, later the British Raj decided to settle Indian debts with promissory notes – and not even silver. It was this Indian ‘sacrifice’ which enabled the recovery of the West.

Done over the protests by Gandhiji, trade bodies and merchants and threats of resignation by the Viceroy and his Executive Council, the resulting ‘money famine’ (page 155) had the Lord Willingdon ecstatically say ‘Indians are disgorging gold‘ (page 156). Neville Chamberlain pitched in with his classic statement “The astonishing gold mine that we have discovered in India’s hordes has put us in clover.”

Crash in silver prices

New mines and increased silver production saw a crash in silver prices. US silver coinage was being depreciated due to increasing supplies of silver. On the other side, Britain had a large debt due to WW1. Britain and America stuck a deal at the cost of the Indian subjects of the British Raj. The US passed the Pittman Act which mandated silver sales at more than a dollar per ounce – double the 50c per ounce prevailing price of silver. Britain agreed to settle all Indian debts with silver. Gold prices were deflated. Interest rates in India were increased. Restrictions on gold imports on were placed and gold demand in India was ‘normalized.’

Impoverishment of India

With crashing exports and increased imports, the Indian citizenry had no option but to pay for all essentials and taxes with gold. As a quid pro quo, for this silver for gold scam, the US lent gold to Britain in 1926, which allowed Britain to revert back to the pre-War old standard.

Looking back, it was clear that this achieved nothing but the impoverishment of India. In 1948, Montagu Norman had to admit that with these maneuvers “We achieved absolutely nothing, except that we collected a lot of money from a lot of poor devils and gave it to the four winds.”