Rs 2,150,000,000,000: that's our gold import bill this year

Indians are piling into gold like never before.

The latest import-export data released on Friday shows that India imported $41.4 billion worth of gold and silver in the April-November period of this financial year. That’s over Rs 2,15,000 crore at current exchange rates.The imports are a record 56 percent higher than the corresponding period of last year.

What’s going on?

Are Indians buying more jewellery? No. According to the World Gold Council, overall demand for jewellery fell marginally from 472 to 464 tonnes in the first nine months of calendar 2011, but investment demand went up by a quarter to 296 tonnes.

[caption id=“attachment_153006” align=“alignleft” width=“380” caption=“If gold imports are curbed, there could be an increase in smuggling - but this may be economically better than to let the rupee slide indefinitely. Reuters”]  [/caption]

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Indians, traditional gold lovers, are finding the metal unaffordable to make jewellery, but are still buying it as a form of investment - because the value of everything else is being destroyed by double-digit inflation.

In fact, the doughty Indian is stocking up on gold for the same reason the Reserve Bank of India (RBI) did in November 2009, when it bought 200 tonnes from the IMF - to preserve the value of wealth. With the future of the euro and the dollar uncertain, it made sense for the RBI to diversify. In its forex kitty, the best returns have come from gold.

Ditto for the aam Indian. Over the last one year, gold has yielded a return of nearly 25 percent.

The macro picture is interesting. Next to petroleum products, which accounted for $94.1 billion of imports in April-November, India’s biggest import is gold.

These massive imports are tipping the external trade balance heavily against us, and Commerce Secretary Rahul Khullar says that the overall trade deficit will be in the range of $155-160 billion in 2011-12.

In the remaining four months of the year, we will surely see further gold imports - say another $10-20 billion worth. It means nearly a third of our trade gap–thanks to our gold-lust.

Since the rupee’s value is influenced by the current account deficit - the gap between out total foreign exchange earnings and remittances before accounting for capital flows - gold is an important tipping factor in the value of the rupee.

The paradox is that as the rupee depreciates, inflation worsens since imported goods cost more in rupee terms. And when inflation worsens, it makes more sense to hold gold to retain the value of your wealth. But as more gold is imported, it skews out trade gap, contributing to the rupee’s weakness.

The upshot: what is smart investment for the average Indian is making things worse for the country. If the government wants to cut down its current account deficit and ease the pressure on the rupee, it should try and curb gold imports in the short term.

Of course, this will have some negative implications, too. If gold imports are curbed, there could be an increase in smuggling - but this may be economically better than to let the rupee slide indefinitely.

When gold soaks up a part of the domestic money supply, it reduces overall demand and curbs inflation.

No gold-loving Indian is going to love me for saying this, but it’s time to restrain gold imports till the rupee and the current account balance stabilise.