|India gold jewellery imports jump|
to 4-5 T in Jan vs 1-1.5 T in Nov.
Second, the official national income figures, by construction, exclude smuggling. Hence, if one were to make a realistic assessment of the CAD, we may have to augment the standard saving-investment (S-I) identity for open economy—savings minus investments equals CAD—for smuggling. As argued above, the diversion of household investible surplus into gold will have the effect of reducing financial savings (S). The gold imports, under the present accounting treatment (which is itself debatable), are recorded as investments under a separate heading ‘valuables’. When augmented for smuggling, the S-I gap in the LHS will be higher because the unofficial gold imports will add to the official estimates of valuables thus increasing the S-I gap and the same will be mirrored in the CAD. The official CAD, therefore, represents a lower bound on the true CAD, albeit with considerable band of uncertainty to the extent of trade mispricing.
Lastly, with R4,500 crores of monthly purchases as DRI suggest, it is reasonable to assume that there is an organised parallel market in FX which caters to financing such operations. The domestic unofficial supplier who receives rupee must convert the same in some foreign currency to pay his foreign supplier for there is hardly any domestic production of gold in India. Thus, for e.g., the dollar-rupee unofficial rate and official interbank rate will have a bidirectional causal effect. In fact, a recent RBI study on NDF suggest such bidirectional relationship between onshore and offshore rupee markets rates which becomes unidirectional at time of distress and offshore markets determine the domestic rates. To what extent does the presence of such a domestic parallel FX market affect the official interbank exchange rates and the threat that it poses to financial stability remains unexplored.
In conclusion, in assessing the cost-benefits of import duty on gold, one has to be more realistic and factor in the ramification of gold purchases through unofficial channels and its impact on CAD. We have shown that CAD is negatively affected when standard savings-investment identity is augmented for smuggling. The extent of how such operations are financed through parallel FX markets could endanger financial stability is an area that remains unexplored. On a net, it now appears the cost of the gold curbs might have outweighed the benefits.
The author is chief economic advisor, State Bank of India. Views are persona.
Courtesy: The Financial Express