How Will Restricting Gold Imports in India Affect Gold Rates?

The Indian economy is not experiencing the best of times at the moment. As a matter of fact, the Finance Minister of the country, Mr P. Chidambaram, has made an appeal to get people to resist the temptation to purchase gold at every opportunity they get as it can help significantly in reducing the economy’s current account deficit. The main reason for this is that India is the largest consumer of gold in the world.

While citizens of most of the developed nations invest in stocks and shares as much as they do in other commodities, Indians primarily focus their finances on investment in gold. The problem with a good percentage of our population is that it has no access to stock markets. As a result, gold is the preferred investment instrument owing to its consistency despite the fact that the returns on stock market dealings have the potential to be much higher. Gold is viewed as more liquid even in comparison with real estate. Moreover, the fact that it doesn’t need huge investment makes it the most viable option for most Indians.

The fact that gold is easily accessible has encouraged an increasing number of Indians from all walks of life to invest in the precious metal. However, investment in gold has never been as serious as an issue as it is right now, and to better understand why this is happening, we must understand Current Account Deficit.

The difference between an economy’s total imports and total exports is its current account. In case exports exceed imports, the current account will be surplus, and current account deficit occurs when imports exceed exports. When India has a current account deficit, it must use its Forex reserves to draw a balance, and while this happens, the Forex reserve is depleted. If this happens for a prolonged period of time, we stand a risk of running out of money for the purpose of imports.

The three main commodities imported by India are gold, cooking oil and crude oil. While cooking oil and crude oil can be considered essential commodities, gold does not fall under the same category. As such, the government is intent on lowering its gold imports. However, there are certain issues that do not favour this appeal. For starters, the country does not possess a safe investment instrument in comparison with gold as most of our people don’t trust other options. Since a large number of people continue to invest in gold, the country’s gold import also increases in order for supply to meet demand, thus increasing inflation.

By restricting gold imports in the country, India will not only limit the consumption of gold, but will also stand a better chance of settling its current account deficit, thus upping prices and making gold a slightly more inaccessible investment instrument.