As we all Know that India's CAD is increasing because of increase in Import of gold due to which our economy is facing lot of problems. Here is an attempt to show you all how we can reduce Our gold import
WAYS TO REDUCE GOLD
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
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
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
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
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
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
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
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
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
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
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
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
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.