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Attractive fin instruments needed to check gold demand: Rajan

February 27, 2013 20:07 IST

Chief Economic Advisor Raghuram Rajan on Wednesday pitched for making financial instruments more attractive to tame demand for gold, saying an over 5 per cent current account deficit (CAD) is way too high.

"If we get a low inflationary environment, savings become more attractive, financial savings become more attractive, then perhaps the desire to go for gold is lower," he told reporters here.

Gold import in value terms in the April-December period stood at $38 billion. It was $56.5 billion in 2011-12 fiscal.

A high gold import is putting pressure on the CAD, which touched a record high of 5.4 per cent of GDP in the July-September quarter. CAD, which is the difference between inflow and outflow of foreign currency, was at 4.6 per cent in the first half of the current fiscal.

"The key number that we worry about is the CAD. CAD at over 5 per cent is way too high. In my view 2.5-3 per cent of the GDP is the level we should not exceed," Rajan said, adding that the size of CAD needs to brought down and financing needs to be done more safely.

The Economic Survey 2012-13 tabled in Parliament on Wednesday said steps should be taken to bring down gold import.

"Available indications do not seem to suggest any improvement in the current account balance in the second half. There is a case for discouraging imports of commodities like gold and making efforts to raise exports," the Survey said, adding that the rising demand for gold is only a symptom of more fundamental problems in the economy.

Rajan further said it was imperative to bring down fiscal deficit to provide impetus to growth. The fiscal deficit is estimated at 5.3 per cent during the current fiscal.

"We have to bring these twin deficits down to reduce the scale of our external as well as internal borrowings," Rajan said.

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