Is India’s gold fixation bankrupting the country?

India’s voracious appetite for gold — the biggest in the world — is threatening the health of its foreign trade balance, trade association Assocham said in a new report.

It noted that India imported a whopping 33.8 billion dollars worth of gold last year in the year ended March last year — the biggest gold import bill in the world.

The number is five times that of the United States, which has an economy that is ten times as big as India’s. India’s imports are also 38% more than that of China’s, whose economy is 3.5 times that of India’s.

In all, Indians buy about one-third of the gold that the world produces.

The gold import bill is one of the biggest strains on India’s attempts to keep its imports and exports matching with each other. Every country has to export as much as it imports from the rest of the world, or end up selling parts of it, such as companies and assets, to foreign investors or get into debt from outside.

India’s total goods importis about 350 billion worth per year and gold imports, according to Assocham’s numbers, account for more than 11% of the total bill.

In comparison, India exports only about $300-330 billion, including its non-goods exports of about $100 billion (most IT/BPO services) per year.

Together with a rising oil bill — about 120 billion dollars per year — rising gold prices are affecting India’s import-export balance.

Calculated on the basis of compound annual growth rate of period 2010-11 over 1999-2000, the gold import bill could total 100 billion dollars by 2015-16, it warned. India’s gold import bill was only 4.1 billion dollars ten years ago.

“At these levels, gold imports are a huge burden on the balance of payments and accentuates the current account deficit. On the other hand, it represents a massive strain on investable resources and weaning away domestic savings from gold assume importance,” it said.

Assocham pointed out that unlike other items of imports, such as oil and machinery, gold is imported mostly to meet a ‘savings need’ rather than a material requirement.

Indians have traditionally invested in the yellow metal, rather than in stocks or cash, as the latter are seen as unreliable. Assocham said the government must take steps to increase the reliability and attractiveness of alternate investments, so that the money can stay within the country.

India produces almost no gold and has to import nearly all of what it consumes.

Efforts must be made to introduce more financial saving instruments and extensive education campaigns should be undertaken – particularly in rural areas – to minimise propensity towards gold, Assocham said.

“India’s gold imports are unsustainable and the government should encourage channelising savings in formal financial instruments to increase productive capacity of the economy. Post offices – especially in rural areas – should be used to sell such government guaranteed instruments to extend their reach throughout the country,” it said.

The total import value of gold during last financial year was higher than the gross state domestic product of 12 states and budgeted estimated expenditure on fertiliser and food subsidy, it said.

“Equally astounding is the fact that India imported more gold than the annual budgeted estimated expenditure outlay on water supply urban development and sanitation,” said ASSOCHAM secretary general D.S. Rawat.

According to the Reserve Bank of India’s review of macro-economic situation, the current account deficit is a cause of concern because of inelastic gold and oil demand.

With the government increasing import and excise duties on gold and silver, both commodities are set to cost more. The new rates on ad valorem basis – two per cent on 10 grammes of gold and six per cent on one kilogramme of silver – mean that importers will have to pay double the duty, Assocham said.