C Rangarajan, chairman, Economic Advisory Council to the Prime Minister, is known for his conservative views on gold, which he calls a ‘non-productive asset’.
He was amongst the first to flag up the fast-rising import of the yellow metal putting pressure on the current account deficit.
After recommending tightening of gold imports, the government gradually increased the import duty and the Reserve Bank of India tightened import norms.
In an interview to Business Standard, Rangarajan says CAD will be brought under control at around two per cent of the gross domestic product.
He, however, doesn’t see the need to relax duty or import rules. Edited excerpts:
The CAD now seems to be coming under control due to a fall in gold import. What is the accepted level of gold import?
It is expected to remain at around two per cent of the GDP in FY14, much lower than last year (FY13).
This is partly due to a fall in gold imports. Gold imports prior to 2009-10 used to be $30-40 billion, which went up after that; last year, it was $54 billion.
Gold demand was rising as it was imported for being a hedge against inflation, which was high and also as an asset.
In my view, once investors start getting better returns from financial assets and inflation starts moderating, there would be sustained reduction in import of gold.
Imports should stabilise at the pre-2009-10 level and $35-40 billion worth of gold import is still possible to absorb and may not cause any serious problem to CAD.
If, eventually, Indians bring in fundamental change in the use of gold and reduce its demand, it will be good for the country but those changes don’t happen in the short term.
With CAD under control and the gold import bill also much lower, do you think this is a time to relax gold import curbs?
I don’t think the Customs duty on gold is so high.
If you look at the import duty on many other luxury goods, others have much higher duties.
Isn’t gold also a virtual currency?
But it is also a commodity and I don’t think the import duty for gold is high.
The other thing is the 80:20 rule (80 per cent of import for domestic use and 20 per cent for exports).
This seems to be a reasonable rule, as it allows imports and is a self-correcting measure.
Therefore, I think a sudden drop in gold import was not due to rules but it was the way they were implemented.
Because of that, there was no import of gold for some time.
So, procedures can be simplified, even if basic rules are not changed?
It can be.
In the overall current account, around $35 billion worth of gold can be absorbed.
That will be consistent in our efforts to contain the CAD in the range of 2-2.5 per cent of GDP.
You may have seen unofficial import of gold estimates.
The World Gold Council has estimated unofficial import in 2013 at 200 tonnes.
That is due to the high duty and import curbs.
I doubt the estimate of unofficial import could be that high. There is no evidence of reduction in remittances, etc.
If gold smuggling has to be financed, it can be either lower remittances or over-invoicing of imports and so on.
The latest numbers don’t show any decline in private remittances and, hence, I am not sure whether this number is correct.
Image: C Rangarajan