India had depleted foreign exchange reserves and we needed to get foreign exchange really fast, or we would not be able to import oil. There would neither be petrol nor diesel and economic activity would have come to a standstill.
Now India keeps importing gold and spends billions of dollars in importing it. India’s gold import bill was placed at a staggering $46 billion in April-November 2011. In fact, it was the second highest after crude oil which was placed at $71-$72 billion. In doing so, we lose foreign exchange that we have accumulated through exports of goods and services.
Now the penchant and desire to keep importing gold will put pressure on the Indian rupee and also on India's foreign exchange reserves and balance of payments. If not checked, imports could spiral and in the long term we could well head for an economic crisis like 1991, with very little or no foreign exchange to pay for things like oil which we have to import. In fact, India's gold imports in 2011 grew by 50% and if it keeps growing at 50%, India would see a huge foreign exchange outflow.
So, in order to discourage gold imports, the Finance Minister Pranab Mukherjee decided to increase the import duty in the Union Budget 2012-2013 - categorically saying that it was drain on foreign exchange He had hiked the import duty on gold bars, coins and platinum from two to four per cent. We cannot stop importing crude oil, but we certainly need to have better control with gold, which is often considered a non productive asset.
In any case, at the moment India's foreign exchange reserves are a staggering $294.82 billion (week ended March 16). So, it's not time to really panic, but then prevention is always better than cure.