The calendar year ended 2021 was a good year for GDP recovery and also for the stock markets as represented by the Nifty and the Sensex. However, the year also saw record trade deficit caused by one big factor called Gold.
Trade story and gold
For the calendar year 2021, the total trade deficit was in excess of $150 bn. While this was largely accounted for by crude oil imports in the midst of rising oil prices, there was one more factor that was responsible for this huge trade deficit in 2021. Gold imports are sharply higher in 2021 and is already the second largest item of imports into India after crude oil. Ironically, gold imports are higher than most industrial inputs.
How big is India’s gold imports
For the calendar year ended 2021, the Indian economy reported full year gold imports of $55.7 billion. That is nearly 2.5 times the gold imports in 2020. It is also the highest gold imports ever, more than $53.9 billion of gold imported into India at the previous peak of gold prices in the year 2011. In fact, gold imports accounted for one-third of the total merchandise trade deficit for FY21. The annual gold import last year was more than other critical industrial inputs like coal briquettes, electronics, diamonds and petroleum gas. On an average, gold now accounts for 7% of the total import bill and 33% of the goods trade deficit.
Triggers for gold import surge
There were several triggers for the surge in gold imports. The big demand came from jewellers, India being the 2nd largest consumer of gold in the world. Most jewellers wanted to make the best of the festival season gold demand in 2021 and that led to a bug surge. Also, there was a lot of inventory demand as most jewellers stocked up gold fearing another bout of the Omicron variant. The biggest evidence of this gold import surge is available in contribution of valuables surging 78% in GDP growth. Gold has also been aggressively sought by many consumers due to the price correction in 2021 as well as for holding gold as relatively secure store of value.
Why gold imports are a worry?
Why is the RBI so worried about a surge in gold imports? Gold is an unproductive allocation, because unlike diamonds or crude imports, they do not result in higher domestic output or exports. Gold is just consumed and locked up. That is why RBI is wary of using precious forex reserves to fund gold imports. So, what is the way out. One way is to put curbs on gold imports like in 2012, but as we have seen in the past, curbs have their own negative repercussions. Another idea is to revive the Gold Monetization Scheme of 2015, which was shelved due to tepid response. Churning domestic gold would be a much better idea than letting gold spike the trade deficit!
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