Know why import of Gold hurts Indian Economy

http://www.assocham.org/arb/general/Indias_Gold_Rush_Its_Impact_and_Sustainability.pdf

India imports most of its gold requirement. Gold as a commodity on its own does not add much to the productive capacity of the economy. 

Moreover, the foreign exchange reserve that is used to import gold reduces the availability of this resource to finance the import of other commodities. Such high value of gold imports has now started hurting India’s current account position.

Gold’s share in total import bill of the country has gone up from 8.1 per cent in 2001-02 to 9.6 per cent in 2010-11.

Annual Rate of Gold Imports growth in the last three years was very high. In 2008-09 the growth was 23.0 percent, in 2009-10 it was 38.1 per cent and in 2010-11 the recorded growth stood at 18.3 per cent. Thus the average rate of growth during this period was 26.8 percent. Although the global financial conditions prevailing during this period were volatile yet such high levels of gold imports indicates India’s obsession with gold.

ASSOCHAM projections for gold imports suggest that:

The projected Gold Import figures under two different conditions would be:

Scenario 1- Gold import bill would be US $ 100 billion by 2015-16 Scenario 2 - Gold import should reach US $ 65.4 billion in 2015-16

• In terms of percentage share of gold and silver combined were the 2nd most imported commodity in 2010-11. Whereas comparatively the import share of other key industrial raw materials such as Coal, Coke, Iron and Steel is much lower in the total import bill of the country.

• India accounts for nearly one-third of the total world demand for gold.

• Indian consumer demand for gold is 37.6 per cent more than that of China.

• Whereas in terms of GDP, India’s GDP is just 27.7 percent of China and a meager 11.0 percent of USA.

• India’s forex reserves are 8.81 percent of China’s forex reserves yet its gold demand is more than that of China by 37.6 percent.

• India’s gold imports were higher than the twelve states GSDP in the year 2010-11.

• Gold import value for the year 2010-11 was higher than the budget estimated expenditure on Urban Development, Housing, Family Welfare for the year 2010-11

Thus there is an urgent need to encourage the substitution of gold purchases with alternatives in the formal financial sector which shall also help in increasing the productive capacity of the economy.