I found it rather odd that the
Indian Finance Minister had to be beseeching people of the country not to buy
gold. He has requested everyone not to buy gold for at least one year in view
of the mounting current account deficits. Rising demand for the precious metal,
he said, is met increasingly by imports which push up the trade deficit,
impacting on balance of payments. The consequential mounting current account
deficit is causing scarcity of dollars weakening the rupee. Lately the rupee
has lost heavily against the dollar and is now pegged around 60 to 61 to a
dollar.
Reportedly around 95% of the
requirement of gold is imported. In the month of May this year alone 162 tonnes
of gold was reported to have been imported. Gold is only next to crude oil for
the import of which billions of dollars are expended annually. With the
economic slowdown in Europe and elsewhere our exports are slack, unable to
match the outgo of dollars for imports. Dollars have thus become scarce,
seriously affecting the value of our own currency. If this situation persists
prices of all consumables are likely to rise, adding to the prevailing high
rate of inflation. Apart from a few millions sinking into poverty a fear has
been expressed that we may face a 1991–like situation when we had to mortgage
away our gold. Perhaps, the appeal of the Finance Minister has to be viewed in
this context.
But one must point out that
making an appeal is not really enough. Our people are largely cynical and
indifferent to all that happens around them. It wouldn’t be too much to say
that they are basically self-centred in most respects, more so in respect of
securing their lives and those of their dependents against emergencies.
Renunciation cannot be expected from them in this respect, particularly when they
see politicians and their relatives filling their own coffers by corrupt means
regardless of the country’s difficult economic situation.
Gold has
traditionally been considered an ideal form of security against financial
emergencies. The stock market see-saws frequently causing enormous losses to
investors, investing in real estate is full of risks and hassles and returns on
deposits Investment in gold, however, is not only
risk-free but also hassle-free. It can be bought right off the bazaar. Middle
and upper classes, therefore, load their daughters with gold while marrying
them off. The demand for gold for this purpose is born out of age-old tradition
and has, of late, been effectively stoked by the daily TV soaps where women of
the house are shown all the time loaded with gold ornaments from head to foot.
don’t beat the prevailing inflation rate.
Even the corrupt
involved in cases of astronomical sums of money find gold convenient for
salting away their ill-gotten pickings. Whenever law enforcement authorities
have chosen to raid the corrupt – their incidence are few and far between than
what it should have been –they have come across tonnes of gold in the shape of
bricks and ornaments. For the corrupt gold is easier to exchange for goods and
services as also amenable to easy concealment. Very few have been daring enough
to flaunt their ill-gotten gold in the shape of furniture, cutlery, golden
coronets for their deity and so on like the one-time mining magnates Reddy
brothers of the “Republic of Bellary” who are currently cooling their heels in a
Hyderabad prison.
Gold, therefore,
is something which is precious and continues to be chased by the rich or poor
and by the corrupt. Its demand is highly unlikely to wane at any time soon
unless restrictions are placed directly or indirectly for its acquisition. The
government had recently tried to curb its demand by increasing the import tax
on it from 4 to 6%. In the context of the escalating unsustainability of the
current account deficit it was a
feeble attempt. If the import of oil and gold
are the villains it is the latter that needs to be up against the axe. Oil
imports cannot be curbed for reasons that are too obvious. It is gold the
import of which can be restricted, if not by a ban, at least by hiking the
import tax which, the experts say, should be raised to at least 20% to make it
effective. Its price may go through the roof, giving the smugglers a field day.
If criminality gets promoted, so be it. At least the economy would be saved.
Smuggling, however, is something that the government can always clamp down upon
with stricter vigilance.
The Finance
Minister recently opined that there was no need to panic over the falling
Rupee. He may not feel panicky and, ostrich-like, also claim that the economy
is stronger than what it was this time last year. Regardless of what he says, a
weak rupee adversely affects people in myriad ways, most important of which is
the rise in prices, especially of fuel. The oil marketing companies recently
raised the price of petrol by as much as Rs. 2 and hikes in prices of diesel
and LPG may not be far away. When that happens, it will have a proverbial
cascading effect on most commodities. Besides, in a globalised economy the cost
of everything that has an import-content will go up. Already the manufacturers
of consumer goods and electronics have threatened to pass on the excess costs
of imports to consumers. The ministers and other politicians need hardly panic
over the price rise as most of them are
billionaires and have adequate cushioning to tide over such minor
contingencies; it is the people at the lower economic strata making an honest
living will face the music.
To meet the
mounting trade deficit the government, apart from curbing gold demand, would
also need to look out for opportunities for increasing exports not only by
diversifying the product range but also by exploring possibilities of markets
in countries that are not traditional importers of Indian products. Our export
earnings need to match the mounting costs of imports or else we are likely to
become an economic basket case.
Vigour has to be
brought back into slipping manufacturing and infrastructure spruced up. Action is,
reportedly, now being initiated to “unlock” investments in projects amounting
to a mindboggling 7 lakh crore (seven hundred thousand billion). Some of them
are World Bank funded and others relate to infrastructure that have been
languishing for want of clearances at the central and state levels. The PM
directed their fast-tracking and ordered constitution of a monitoring group
within the Cabinet Secretariat to keep a keen tab on them.
To me as a
layman, it appears to be a little shameful for the government to decide now at
such a late stage to start monitoring progress of approved projects when things
seemingly have come to a crunch. This should have been happening all along. I
recall, while visiting Malaysia under the Advanced Professional Programme on
Public Administration conducted by the Indian Institute of Public Administration
in 1981, our group was told by a representative of Malaysian Government that
all projects of more than 100,000 dollars (the then Malaysian currency unit)
were being monitored by the Prime Minister. Why have we been so sluggish in
doing what other countries richer than ours have been doing for decades?
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