All worked up over gold

The government action hiking tax rates on gold and RBI's clampdowns on banks and others has obviously drawn the most attention in the past one week, but the huge participation from investors to the inflation indexed bonds has got emasculated in the process. But in terms of effectiveness of response possibly the bonds hold a stronger promise.

The bonds were this time restricted only to the institutional investors, yet were over subscribed four times. An issue for the retail investor will be the real draw later this year and will tell the government and RBI if they have really found an antidote to the gold fever for keeps. High gold imports mean the current account deficit (CAD) already reeling from poor exports has a major overhang. In the first two months of this fiscal gold imports have averaged 150 tonnes a month against an average 70 tonnes a month during April and May 2012. Analysts warn that if gold imports — the second largest contributor to the import bill after crude oil, continues at this rate, the CAD will not improve much in 2013-14.

Reining the CAD is essential to attract investors and revive growth. In this situation, North Block officials stress while the crude oil imports, that help fuel economic activities performs a useful role as an ingredient of the productive economy, gold performs no such role. Data from the World Gold Council points that gold is largely being used as safe haven investment. Between January to March 2013, the data shows while jewellery demand rose by 15 per cent in India, gold for investment increased by 52 per cent.

While restrictions on imports may help now, the longer term solution in terms of more attractive investment options are obviously the way out. As finance ministry's chief economic adviser Raghuram Rajan pointed out the people buying gold are often our own mothers and grandmothers.

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