Google Trends shows that the term “current account deficit” is among top searches from India in 2013. Add “gold” as a comparative keyword and the searches for the commodity Indians love are far higher.
Indians buy gold for everything – investment, gifts, wedding ceremonies and auspicious days. But of late, this has become a pain for policymakers.
As the Indian economy struggles, policymakers say that high gold imports and the rising current account deficit are big concerns. India’s number one import, crude oil, and gold, it’s number two, hurt the current account deficit. While crude oil is necessary, gold is not, especially if we believe our finance minister.
“I’m hoping that the people of India will heed my appeal and will not demand so much gold,” Finance Minister P. Chidambaram said in March, soon after he claimed during his budget speech that India’s ‘passion for gold’ is responsible for the high current account deficit.
In recent months, falling gold prices prompted heavy gold buying in the world’s biggest gold consumer. The result: India imported around 162 tonnes of gold in May, more than the 142.5 tonnes imported in April, and high enough to worry Indian policymakers.
In June, Chidambaram spoke up again: “I would once again appeal to everyone: please resist the temptation to buy gold”.
The government and the Reserve Bank have taken many steps this year to reduce India’s appetite for gold. Here’s a timeline of key events in 2013:
Jan 21: The government raises its import duty on gold by 2 percentage points to 6 percent. Industry officials say they expect only a moderate drop in demand.
Jan 22: India targets raw gold in its second duty hike that week. The government more than doubles its duties on gold alloy.
Jan 30: The government says it does not plan additional taxes or curbs on imports of gold as it waits to see the impact of recent tax hikes.
Feb 6: The RBI says it could limit gold imports by banks in “extreme circumstances” and puts forward measures to help rein in purchases.
Feb 28: The government keeps the gold import duty unchanged in the annual budget even as industry experts say they think the duty will be raised.
April : Gold prices in India fall sharply to about 25,500 rupees/10 grams (around $425/10 grams). Such levels were not seen in the last 18 months. There is global selling as Cyprus’ plan to sell bullion reserves, fears of the U.S. Fed ending its stimulus, worries of central bank sales and investors dumping gold push prices down.
May 3: The RBI proposes to restrict gold imports on a consignment basis by banks only to meet the genuine needs of jewellery exporters, adding that the guidelines will be issued by May 31.
May 13: Lower prices mean more buying. Data show that India’s gold and silver imports shot up 138 percent on year in April as customers took advantage of lower prices. The data shocks the government. The RBI steps in, brings into effect previously announced restrictions on banks importing gold.
May 20: Chidambaram says India will take more steps if necessary to curb gold imports.
May 27: The RBI says banks will not be allowed to give loans against units of gold exchange-traded funds and gold mutual funds.
June 3: India imported around 162 tonnes of gold in May, a finance ministry official says. This was much more than expected.
June 4: The RBI takes tougher measures, saying domestic jewellers can only buy gold on a cash basis. By doing this, the central bank makes the overseas purchase of gold a cash and carry business. Shares of jewellery makers fall.
June 5: Another gold import duty hike. The government increases the import duty on gold to 8 percent from 6 percent. A government official says the next day that it might take more steps to curb gold inflows.
June 21: Reliance Capital abruptly halts gold sales and investments in its gold-backed funds, saying it is ”committed to support all policy objectives of the government and the RBI”.
June 24: India’s biggest jewellers’ association – All India Gems and Jewellery Trade Federation – asks members to stop selling gold bars and coins, which makes up about 35 percent of their business.
June 25: The RBI tells rural regional banks that they can no longer provide loans against gold jewellery and coins.
June 27: The RBI rules out any credit transactions for gold imports unless they are intended to make jewellery for export.
(You can follow Aditya on Twitter at @adityayk)