FM's move to curb gold fails as imports surge 150 percent

If the Indian government was horrified with its people’s love for gold in the past, it has reason to be more horrified now.

That is because a sharp fall in gold prices is holding up the demand for gold.

In fact, a report from the World Gold Council sees India’s gold imports surging a whopping 150 percent on year in April-June of 2013.

“India, which represents 28% of global consumer demand, may see an increase of up to 150% year-on-year in Q2 2013. This suggests that up to 400t of gold may be imported into India during Q2 2013, almost half of the total imports in the whole of 2012,” the report said.

This despite the government making all-out efforts to nudge its inflation-hit people away from gold. The government was worried because it thought increasing gold imports was resulting in wider current account deficit and thus weakening the economy.

Interestingly, all government efforts to bring down gold import have had an opposite impact. First, it increased the gold import duty by 4 percentage points to 6 percent in two phases. And there were also threats that it may further increase the duty. Fearing this, traders imported gold with much more vigour so that they can stock it for rainy days. The government also proposes to link gold exchange traded funds (ETF) and banks’ gold deposit scheme (GDS). Recently, it also announce issuance of inflation-indexed bonds, a step in right direction but flawed the inflation the bonds are indexed is just WPI and not CPI.

The RBI, which too attributed the widening current account deficit to increase in gold imports, also took following steps.

1. It restricted banks from importing gold on a “consignment” basis for anyone other than jewellery exporters.

2. Restricted banks from lending against gold coins beyond 50 gm per customer.

3. Just this week, it also bared banks to give gold loan against gold ETFs and MFs.

4. And finally, NBFCs have also been banned from giving loan to buy gold.

But the WGC report shows that if the the government thought that such steps will kill Indians’ love for gold, it is living in a fool’s paradise. The report is actually a mirror the government should look into.

“The shift in US investor sentiment, which precipitated the sharp drops in the gold price, is being countered by a surge in Asian market who believe in long term prospects for gold,” according to the report.

In short, on the gold front, the worst is yet to come for the government.