WAYS TO REDUCE GOLD

IMPORT

Ruchi Gupta

gupta.ruchi93@gmail.com

CONTENT:-

What is gold?

Various uses of gold

Relation between price of gold and other economic factors

Importance of gold in India

Why increase in demand of gold in India.

Import of gold in India.

Negative effect of gold import on Indian economy.

Steps taken by government for reducing import.

Steps that should be taken by government to reduce import.

WHAT IS GOLD?

Gold is an element and a mineral. It is highly prized by

people because of its attractive color, resistance to

tarnish and its many special properties - some of which

are unique to gold. Its rarity, usefulness and desirability

make it command a high price.

Trace amounts of gold are found almost everywhere but

large deposits are found in only a few locations. Although

there are about twenty different gold minerals all of them

are quite rare.

VARIOUS USES OF GOLD:-

Jewelry:- Gold has been used to make ornamental objects and

jewelry for thousands of years. About 78% of the gold consumed

each year is used in the manufacture of jewelry.

Financial Gold: Coinage, Bullion, Backing :-The gold used as a

financial backing for currency was most often held in the form of

gold bars, also known as "gold bullion". The use of gold bars allowed

convenient handling and storage.

Industrial use:- The most important industrial use of gold is in the

manufacture of electronics.

This includes: cell phones, calculators, personal digital assistants,

global positioning system units and other small electronic devices.

Gold is known to have been used in dentistry.

Gold is used as a drug to treat a small number of medical conditions

Gold is also used as a lubricant between mechanical parts.

it is the metal associated with highest esteem and status.

RELATION BETWEEN PRICE OF GOLD AND

OTHER ECONOMIC FACTORS:-

Gold is a leading economic indicator. The relationship between the price

of gold and important economic factors are:-

The Dollar:- The US Dollar has an inverse relationship exists

between gold and the dollar. As the dollar weakens, the price of gold

increases. In contrast, the price of gold decreases as the dollar

strengthens. As the dollar continues to weaken against foreign

currencies, investors lose confidence in the dollar and invest more

money in gold.

Inflation:-Inflation involves the loss of purchasing power. When an

economy is experiencing inflation, it takes more dollars to buy a

product or service than it cost in the past. Investors tend to shift their

money to gold when they believe inflation is on the horizon. A greater

demand for gold causes the price of gold to increase. Many investors

use gold as a hedge against inflation. Fear that the dollar will lose its

value causes individuals to invest in a tangible asset that holds value.

Interest Rates:-When the economy is performing well and market

interest rates are high, treasury notes, money market accounts and

certificates of deposit offer investors attractive interest rates that are

greater than the inflation rate. When market interest rates are low,

these investments offer low interest rates that are usually lower than

the inflation rate. An investment with a rate of return lower than the

inflation rate results in a negative return. The low interest rates and

negative returns make investing in gold an attractive option for many

investors.

The price of gold affects countries that import and export it:-

The value of a nation's currency is strongly tied to the value of its

imports and exports. When a country imports more than it exports, the

value of its currency will decline. On the other hand, the value of its

currency will increase when a country is a net exporter. Thus, a country

that exports gold or has access to gold reserves will see an increase in

the strength of its currency when gold prices increase, since this

increases the value of the country's total exports.

IMPORTANCE OF GOLD IN INDIA

In India, besides the economic and strong social consideration,

individuals are highly sentimental about the gold jewellery in their

possession, as the gold ornaments are passed on from one

generation to another. Acquisition of gold is considered

auspicious. On the global front, India is the largest consumer of

gold. India accounts for more than 30 per cent of the global

gold market. However, the domestic production of gold in India

is minimal. India meets the high demand of gold from its

domestic consumers by importing it..

WHY INCREASE IN DEMAND OF GOLD

IN INDIA?

The lack of alternative investments is one of the reasons attributed for

Indian investors favoring gold over domestic capital markets.

Gold as an asset class plays a very important role in an investor's

portfolio as it not only provides stability to returns but also gives an

opportunity to maximize wealth over a longer time frame.

Gold has proven to be a safe-haven investment option because of it

being a hedge against inflation.

Gold is also considered as a medium that can be pledged easily during

difficult times for securing financial accommodation.

Demand for gold is also increasing because gold transactions are

mainly held on cash basis and people can easily convert their black

money into white and can also prevent tax payment as cash received

by seller remains undisclosed.

In India people buy gold during special occasions like weddings, festivals

or special events.

high inflation and slow GDP growth have made alternative assets like

equity and debt unattractive. At the same time, gold has gained against

hard currencies.

In rural areas people have to compulsory keep their money invested in

gold by purchasing gold jewellery due to lack of banks and people do not

have knowledge of various other kinds of instruments that are available

in market.

Gold is easier to keep and requires less attention as hard currency is

very prone to damage and deterioration.

So we can say that Investment in gold is becoming price

inelastic and income elastic.

IMPORT OF GOLD IN INDIA

India imported around 162 tons of gold in May 2013, up from

142.5 tons in April 2013, recording a 138 percent increase in

imports made a year earlier.

NEGATIVE EFFECT OF GOLD IMPORT ON

INDIAN ECONOMY

The first major problem the Indian economy faces with this high gold

consumption rates is the increasing current account deficit

(CAD). India's current account deficit hit a record high of 6.7% of its

gross domestic product (GDP) in the October to December 2012

quarter.

When a country runs a trade deficit it doesn’t earn enough dollars to pay for its imports through exports. What happens in this situation is that

dollars coming in through other sources like foreign direct investment,

foreign institutional investment and citizens living abroad, are used to

finance imports.

Most of the gold bought by us Indians is used for consumption purpose in the form of

jewellary. Even from the investment perspective, majority of the Indians still prefer the

traditional way of holding it in the physical form. However, it is an investment

that does not add much value to the productive capacity of the economy.

Investments in the physical form of gold are either stored in bank lockers or get

exchanged for making jewellery.

The level of black money circulation is increasing in the economy due to

consumption of gold. This is happening because the purchase and sale of

gold is being done in cash thereby hurting the government on two fronts.

Firstly, the purchasing gold against cash gives an individual an

opportunity to convert his black money into white. Secondly, the cash

received by the seller also remains undeclared and thereby no tax will be

paid.

On top of this the gold imports are being financed by the hard earned

foreign exchange. So import of gold is decreasing the level of foreign

exchange reserve in India.

STEPS TAKEN BY GOVERNMENT FOR

REDUCING IMPORT:- The government has raised the import duty on gold to 10% from 8% on

August 2013. It has been seen in the past that a hike in import duty is a

short-term solution. In the medium to long-term consumers come back

to the market.

Banks have been instructed to stop lending against gold and also against

offering loans to buy gold.

the central bank said imports of gold against both suppliers' credit and

buyers' credit would now have to toe the line of 100 percent cash

margins.

It also said imports of gold on an unfixed price basis also had to be on a

100 percent cash margin basis. Gold imports are usually either based on

an agreed, or fixed, price or priced at time of delivery, which is termed

"unfixed".

Introduction of Gold ETFs to reduce the physical demand of gold. But

this has not reduce the demand of gold.

Accordingly, any import of gold on consignment basis by both

nominated agencies and banks shall now be permissible only to meet the

needs of exporters of gold jewellary.

But these changes has not effect the market much and The flip side of

restrictions will be increased gold smuggling and increased grey market

activity.

STEPS THAT SHOULD BE TAKEN BY

GOVERNMENT TO REDUCE IMPORT :-

By increasing various taxes on import and purchase of gold but that

may lead to more gold smuggling.

By offering inflation-protected bonds to damp demand for gold and

offer a hedge against inflation.

India can cut imports by offering investment plans that offer

returns equivalent to gold, through tie-ups with banks and jewelers.

The government could open deposits of gold at banks by customers.

That is, customers could be allowed to deposit gold instead of cash

at banks and earn an interest on the gold for a specified time period.

Better documentation of gold sale and purchase so that government can

know how much amount of gold is actually purchased by people.

It should be made mandatory by RBI to make payment through cheque for

large gold transactions. But because of this buyers may take recourse to

unauthorized channels to buy gold.

RBI should introduce various new gold-backed financial products to

reduce the demand of physical gold. With the help of this demand from

urban consumers can be diverted towards dematerialized gold investment.

Introduction of tax incentive on gold-backed financial products. So that

these gold backed financial products can attract people.

educating people regarding existing gold ETFs (ETFs provides investors

with a relatively cost-efficient and secure way to participate in the gold

bullion market without the necessity of taking physical delivery of gold.)

Increase the reach of Banks:- As per a World Gold Council India has

one of the highest saving rates in the world; estimated at around 30

percent of total income, of which 10 percent is invested in gold. only 21

percent of rural India had access to formal financial sources. Therefore

lack of availability of alternate avenues of investment that might be

resulting in heavy gold purchases.

Liquidity quotient of alternate investment instruments:- a prime

reason behind increased gold purchase is its liquidity aspect. The

government can also consider introducing highly liquid across the

counter instruments with the government guaranting buybacks.

Massive education campaign must be launched- to create awareness

amongst the public as to how unnecessary piling of gold stocks with

households is not only adversely impacting the current account

position of the economy but also what it is doing is increasing the level

of black money circulation in the economy. On top of this the gold

imports are being financed by the hard earned foreign exchange.

Therefore it is imperative for the government to educate the citizens of

the country about the adverse impact of rising gold imports.

Thank you