Banning gold imports will increase smuggling of the precious metal. There are indications that illegal imports have gone up in the last three months, said Chairman of the Prime Minister’s Economic Advisory Council, C. Rangarajan.
“Banning gold imports is a bad idea. If we ban imports, smuggling will go up...,” Rangarajan said at the silver jubilee celebrations of the RBI-promoted Indira Gandhi Institute of Development Research here on Saturday.
The increased demand for gold to some extent is due to inflation. Gold imports touched $60 billion in FY2012, of which $15-20 billion was due to high inflation, he added.
“I believe gold imports will come down when inflation settles down…people consider gold as a hedge against price rise,” said the PMEAC Chairman.
Rangarajan said he was informed by the revenue department officials that the seizures of smuggled gold have gone up in the recent past.
RBI Governor D. Subbarao, who was moderating the panel discussion, said the central bank was concerned about the rising gold imports and cited its impact on the current account deficit.
He also said, “Our announcement to stop lending for gold purchase was a reiteration of a decades-old decision.”
Substantial imports
Last week, RBI Deputy Governor Subir Gokarn said India’s gold imports will reach a “substantial” two per cent of gross GDP in the next few years. Hence, there is a need to offer alternative instruments with “gold-like” qualities.
“People are buying gold despite the high price. This, in some ways, challenges the supply-demand dynamics,” he said at the Indian Banks’ Association’s annual Bankers Conference in Pune.
Gold imports grew 39 per cent in FY2012 and accounted for almost three-fourths of the current account deficit (CAD). India’s current account deficit was 4.2 per cent of GDP, or $80 billion, in FY 2012.
The RBI will bring out a draft paper shortly to propose alternatives such as gold-linked account, gold-accumulation plan, modified gold-deposit scheme, and gold-pension scheme.
Pointing out that growth has moderated even as inflation was high and stubborn, Subbarao said for sustained growth, low and stable inflation is a necessary condition. He added that inflation needed to fall below 5 per cent in the medium term.