India Panel Suggests Steps to Lower Gold Demand - Wall Street Journal (India)

By KHUSHITA VASANT MUMBAI--A panel set up by India's central bank Wednesday suggested introducing gold-backed financial products and periodic review of import duties on the yellow metal, one of the biggest contributors to the nation's large current-account deficit. The recommendations come two weeks after the government raised the import tax on gold to 6% from 4%, the second such increase in 10 months in an effort to cut demand for the metal. "There is a need to moderate the demand for gold imports," the panel said in a report, posted on the central bank's website. The Reserve Bank of India had set up the panel to examine the impact of gold demand on India's current-account deficit, and the business of non-bank lenders who take gold as collateral. The country's current-account deficit widened to a record $22.3 billion, or 5.4% of gross domestic product, in the July-September quarter, according to latest central bank data. India's love for gold is partly to blame for the wide gap. The South Asian nation is the world's top gold consumer and it meets its demand entirely through imports. While gifting gold jewelry is a tradition during weddings and festivals, buying of the metal as a hedge against unyielding domestic inflation is increasingly becoming another driver of demand. The yellow metal is India's second-biggest imported commodity by value, behind crude oil. The country imported gold worth $38 billion between April and December, the first nine months of the current fiscal year, Economic Affairs Secretary Arvind Mayaram said last month. "When the external-sector situation is deteriorating, we cannot but have to manipulate the import duties, as one among multiple strategies to be adopted" to reduce gold consumption, the panel said in its report. Import duties, the panel said, must be reviewed from time to time. If need be, policymakers should ensure that bringing gold into the country is a less attractive option, it added. Capital flows into India remain volatile and uncertain, the panel noted. Hence, large payments toward gold imports inflict a drag on foreign-exchange reserves and worsen the volume of external debt. It also suggested a few steps to divert some demand from physical gold such as jewelry and bars. India could consider introducing new gold-backed financial products, the panel said. Also, policymakers should take steps to encourage recycling of gold held by temples and households, it added. According to industry estimates, Indian households own around 20,000 metric tons of gold. The government could consider capping the volume and value of gold imports in extreme circumstances, the panel said. Tax incentives to encourage gold investors to deposit their holdings with banks could also be considered. According to the panel, the central bank needs to monitor and moderate the speed at which large gold-loan companies expand their branches to ensure the safety of the gold pledged with them. Borrowings from banks are the biggest source of funds for gold-loan companies. This needs to be reduced, the panel added. via Business - Google News

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