‘Being tough on gold imports won’t work’

Two former Reserve Bank of India governors on Saturday warned against taking tough measures to rein in gold imports — a major reason for the persistently high current account deficit (CAD).

The Prime Minister's Economic Advisory Council (PMEAC) chairman C Rangarajan said steps like banning gold imports would only push up its smuggling.

Rangarajan, who served as RBI governor, said there are already indications that illegal shipments of the precious metal have gone up in the last three months after the hike in the excise duty.

"That is an indication of how much gold is being smuggled in. I would say to some extent we should dissuade people from holding an asset which does not give a rate of return. However, you can't go beyond a particular point," Rangarajan said here at a function organised by the Indira Gandhi Institute of Development Research (IGIDR), an institution set up by RBI.

Former governor YV Reddy said, "If Mercedes Benz and aftershave lotion can be imported, why not gold? It is both an investment and consumption good. Many people seem to mistake that it is only hedge against inflation. There is a demand for it. It is being imported. If you can, try to stop it."

The RBI Governor D Subbarao said the central bank is "concerned about gold as means of saving because it blocks off savings".

"We are concerned about gold… lending against gold by non-bank finance companies (NBFCs) because of financial stability concerns. We have been concerned about gold from an external management perspective because of the pressure it puts on current account or capital account depending on your account for it," Subbarao said.

On growth and inflation, Bimal Jalan, Rangarajan's successor and Reddy's predecessor said, "There are periods when growth is more important and you take policy measures to boost it. There are periods when you have to control inflation because that is the dominant public issue. So, there will be periods when you take measures, however, harsh they are to control inflation."

Reddy added household savings which was an achievement till recently is now the most critical challenge for a future. "The behaviour of household savings indicates that they do not have faith in financial markets except banks. It is a bad sign."

Rangarajan said, "If what has happened in the three-year period of decline is reversed either because of a fiscal consolidation programme or because of the inflation coming down lower, it is possible to get back… if not the 9 per cent but the 8 per cent rate of growth."

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