Hoarding gold and then paying more for fuel!

Business

oi-Sunil

By Sunil Fernandes

Published: Friday, May 25, 2012, 10:33 [IST]

As the government tries to squeeze blood out of stone and the RBI rushes to the defence of the rupee, the Indian consumer is paying more for fuel. Could the consumer have contributed to the fuel price hike? Most certainly.

As we crib over the oil price hike, let's remember that consumers are paying more for fuel despite crude oil prices dropping to a six month low. So why are we then paying more for fuel? It's simply because the rupee has depreciated by 21% against the dollar in the last one year. So, if we were importing crude oil at an exchange rate of Rs 48 to the dollar a year ago, now we pay Rs 56 to the dollar.

How is gold related to fuel price hike?

If we keep importing huge quantities of gold, it's going to put pressure on the current account deficit, which will put pressure on the rupee (unless we have tremendous capital inflows) and this in turn will make import of crude oil costlier and hence petrol prices as well.

The rupee depreciates because our current account deficit has reached alarming levels. The current account deficit is the difference between the value of exports of goods and services and the value of imports of goods and services.

So, we import more than we export and it is estimated that 12% of Indian imports are through gold. A Macquaire Research report last year said that net gold imports widened the current account deficit by 40 to 130 bps between 2007-08 and 2010-11. This is huge and if the current account deficit widens then it puts pressure on the rupee and falling rupee makes crude oil costlier and hence petrol, unless capital flows are large enough to fund the deficit.

Of course, the current account deficit also widens because of other imports, but, we cannot avoid imports like crude oil. However, we can certainly reduce our gold imports, which many believe is an unproductive asset and has facilitated hoarding.

According to the World Gold Council India has 20,000 tonnes of Gold and if we multiply the same by the current market price of Rs 29,000, it's a staggering Rs 58 lakh crore. Most of these are lying in bank lockers, temples, sometimes stashed and sometime hidden somewhere.

Yet, we keep importing (for consuming and hoarding) more gold, which will ultimately put pressure on the rupee. In 2010-2011 our gold imports was to the tune of $ 33 billion. It is now expected to reach around $55 billion (a whopping 50% growth).

Finance Minister Pranab Mukherjee was right when he said, “One of the primary drivers of the current account deficit has been the growth of almost 50 percent in imports of gold and other precious metals in the first three quarters of this year (2011-2012)".

Realising the problem with large scale imports of gold on the current account deficit, the government had in the Union Budget tried to discourage the imports of Gold through excise and import duty, but, it did not work and had to roll the same back because of pressure from industry. Our penchant for gold must reduce, or else it will only add to the country's problems.

In this context, it's time to remember a quote from Richard Burton which reads:
“A man that hoards up riches and enjoys them not, is like an ass that carries gold and eats thistles”.

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