Gold is widely seen as a safe investment option in times of economic crisis. So is the gold import surge a sign of falling confidence in the Modi government’s economic management?

New Delhi: The twin curse of gold and crude oil is revisiting India after peaking in 2013-14 and could throw haywire the Narendra Modi government’s calculations on current account deficit (CAD) and fiscal deficit.

If the trend continues, India could see a repeat of the 2013 rupee meltdown when the rupee lost 21% of its value against the greenback in a span of just two months after the then Federal Reserve chairman Ben Bernake hinted at an impending tapering of the Quantitative Easing (QE) in a testimony to the Congress on June 19.

Gold imports more than doubled during April-September from the same period last year, while the price of Indian crude basket rose by 17%  between August 28 and November 1.

Merchandise trade deficit increased by 66% to $72.12 billion during April-September period, from $43.35 billion during the same period last year.

India’s overall trade deficit (after taking into account net services exports and remittances) increased by a whopping 166% to $43.813 billion during April-September from the same period last year, driven by the unprecedented surge in gold imports. Trade deficit is estimated at $16.467 billion in April-September 2016.

India is the world’s second largest gold consumer after China. Its gold import bill in 2016-17 is estimated at $27.30 billion. In the current fiscal, gold import bill has already hit $16.85 billion up to September, registering a growth of 116% over the same period last year.

The country's August gold imports climbed to an estimated 60 tonne from 22.3 tonne a year ago. In the first eight months of 2017, the country's imports rose to 617.5 tonne, up 158% from a year ago.

India imposes a 10% import duty on gold. However, gold import from countries like Korea with whom India has entered into free trade agreement is exempted from duty. To avoid duty-free imports from such countries, India had imposed a 12.5% excise duty prior to the roll-out of goods and services tax (GST).

But introduction of the indirect tax reform on July 1 led to scrapping of excise duty and other local taxes. Taking advantage of this loophole, traders imported large volumes of gold from Korea in July. Later, the government restricted import of gold from Korea on August 25.

India’s gold demand this fiscal has been much higher compared to other countries. For example, while global gold import rose by a modest 8% in April-June 2017 quarter, India saw a jump of 41% in its yellow metal import.

In fact, China, world’s biggest consumer of gold, saw its import decline by 5% during the same period.

In the June quarter, India’s current account deficit (CAD) soared to a four-year high of $14.3 billion, or 2.4% of GDP, on the back of gold import surge.

“The widening of the CAD on a year-on-year basis was primarily on account of a higher trade deficit ($41.2 billion) brought about by a larger increase in merchandise imports relative to exports,” the RBI said.

India meets more than 80% of its crude oil requirement from imports. The external environment has been benign for this government so far with international crude oil prices ruling at less than half their levels in 2013-14. But the situation has started changing now.

The oil has hardened in recent months and is expected to remain firm next year too.

“The large supply surpluses of 2014-16 have disappeared in 2017, and the market recorded a large deficit in the second quarter for the first time since 2013, partly because of unexpectedly large growth in demand,” says the World Bank’s in its latest Commodity Markets Outlook report.

The World Bank report has forecast average crude oil price at $56 per barrel in 2018, up from $53 this year (in nominal dollar terms). If oil prices continue to harden, the CAD could further widen and government’s fiscal arithmetic go haywire, potentially causing panic among investors.

Gold is widely seen as a safe investment option in times of economic crisis. So is the gold import surge a sign of falling confidence in the Modi government’s economic management?

Once again, all eyes are on the next move by the Federal Reserve as India’s macroeconomic fundamentals come under pressure. If the US central bank goes ahead with monetary tightening and hikes interest rates in its December meeting, the rupee could again go into a tailspin.

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