India’s Gold Rush (Possible Solutions)
India’s Gold Rush (Possible Solutions)
Over the past year there has been a significant fall in household savings as a percent-age of GDP from
25.4% in 2009-10 to 22.8% of GDP in 2010-11. This fall in house-hold savings has occurred when the interest rate cycle is at its peak. Conventionally the only way to boost household savings has been to increase interest rates; how-ever that would risk slowing down an already sluggish economy.
The reason for this anomaly in the economy is the huge surge in the gold consumption Indian gold imports have risen from USD 4.1 Billion in 2001-02 to over 40 Billion USD in 2011-12. At the same time, the price of gold has increased from approximately 300 USD per ounce to over 1600 USD per ounce. The above data indicates that the imports by volume have increased from 425 tonnes in 2001-02 to over
1000 tonnes in 2011-12. Without these imports, India’s trade deficit would narrow down by about
25%.The above data does not includes the gold purchased by Indian tourists in tax heavens like Dubai and Singapore. To put the staggering quantity of gold purchased in perspective: India’s gold imports in the last one year is greater than the reserves held by the RBI i.e. 557.75 tonnes.
Source: ASSOCHAM India Report.
Source: Source: ASSOCHAM India Report. To put India’s gold imports in perspective with the governmental expenditure for 2010-11
This gold consumption affects India greatly, because unlike other consumption which the government incentivises as money circulates within the economy creating value and employment; when it comes to gold it is not mined in India thus there is no circulation of money which makes it a dead investment for the Indian economy. This is unlike stocks or fixed deposits which help generate employment apart from the returns they yield. Thus it is the need of the hour for the Indian government to take proactive steps to reduce gold imports and increase savings at the same time. Increasing taxes on gold
Over the past year there has been a significant fall in household savings as a percent-age of GDP from
25.4% in 2009-10 to 22.8% of GDP in 2010-11. This fall in house-hold savings has occurred when the interest rate cycle is at its peak. Conventionally the only way to boost household savings has been to increase interest rates; how-ever that would risk slowing down an already sluggish economy.
The reason for this anomaly in the economy is the huge surge in the gold consumption Indian gold imports have risen from USD 4.1 Billion in 2001-02 to over 40 Billion USD in 2011-12. At the same time, the price of gold has increased from approximately 300 USD per ounce to over 1600 USD per ounce. The above data indicates that the imports by volume have increased from 425 tonnes in 2001-02 to over
1000 tonnes in 2011-12. Without these imports, India’s trade deficit would narrow down by about
25%.The above data does not includes the gold purchased by Indian tourists in tax heavens like Dubai and Singapore. To put the staggering quantity of gold purchased in perspective: India’s gold imports in the last one year is greater than the reserves held by the RBI i.e. 557.75 tonnes.
Source: ASSOCHAM India Report.
Source: Source: ASSOCHAM India Report. To put India’s gold imports in perspective with the governmental expenditure for 2010-11
This gold consumption affects India greatly, because unlike other consumption which the government incentivises as money circulates within the economy creating value and employment; when it comes to gold it is not mined in India thus there is no circulation of money which makes it a dead investment for the Indian economy. This is unlike stocks or fixed deposits which help generate employment apart from the returns they yield. Thus it is the need of the hour for the Indian government to take proactive steps to reduce gold imports and increase savings at the same time. Increasing taxes on gold