August 16, 2013

Gold: Why and How does it impact the Indian Economy?

Hi Guys,

Indian Economy has not been in a very good shape recently. All the economic articles in Newspapers and websites have been reporting gloominess. In the recent months, many of us would have come across this statement multiple times – ‘Please Stop buying Gold’. Our Finance Minister and his team didn’t know a quicker way to stop the decreasing the Current Account Deficit. The import duty on Gold went up from 4% at the starting of this year to 10% step by step. 20% of the Gold imports needs to be exported back again with some value addition.

So, what has been happening? Why all this measures all of a sudden? I decided to look into the issue and what has been happening over the years.

In 2001, the total world production of Gold was 3764 tonnes and India imported 462 tonnes, which turns out to be 12.27% of the total production. In 2012, the total production was 4130 tonnes. India imported 1079 tonnes which turns to be 26.12%. India has consumed one-fourth of the total gold production.

What could be the main reasons? Traditionally, Indians always have an affinity towards Gold Jewellery. In the recent years, we have started moving from the concept of Gold Consumption (buying for Jewellery) towards Gold Investment (buying for future benefits). In 2011-2012, 56% of Gold Imports happened through Banks. It is said that Gold has been purchased more due to the high returns it offers. But if we compare the returns between the period of April 2003 and March 2013, Rs.1000 investment would have given Rs. 5267 in Gold, Rs. 6158 in Sensex, Rs. 5746 in Nifty (Bank deposit at 8% would have given Rs. 2337). So, comparatively stock market has given more benefits.

Stock markets have remained out of reach for most of our population. Many of our fellow citizens are unaware of the stock market. There are many intricacies in dealing with our stock market and hence it is an unviable option for most of our citizens. Though stock markets have given better returns, Gold wins in terms of the consistency. If we draw a graph between stock and Gold, the growth of Gold will be more linear and stock market would be filled with crests and troughs.

Gold is considered more liquid compared to Real estate. It also doesn’t require huge investment. Typically, it is said Peasants are the largest consumers of Gold. It protects them from Inflation. It is said to the best Hedge from uncertainties. It has been found that for every 1 % increase in income, gold consumption increases by 1.5%. India’s Golden period also happened between 2003 and 2010 when the GDP growth was spectacular and the per capita income increased tremendously. Also the MNREGA scheme increased the income of Rural masses and their primary investment turned out to be Gold.

Why has this become a big issue all of a sudden? To know this, we need to know what Current Account Deficit is. Current Account is the difference between a country’s Total Exports to Total Imports. If we have more exports compared to imports, we have Current Account Surplus. If we import more, we have Current Account Deficit (CAD). If we have CAD, we need to use our Forex reserves to settle and in the process, we deplete the Forex reserves. If it continues, in the long run we might not have money to get imports.

From 2007 to 2012, CAD has increased from 1.3 to 4.2% of GDP. Net Gold imports has increased from 1.1 to 2.7% of GDP. Net Gold to Current Account Balance has hovered around 70%. Gold export as percentage of Gold Import has decreased from 41% in 2008-09 to 29% in 2011-12. Gold has remained as one of the chief contributors to CAD. In brief, if we stop importing gold, our CAD would become 1.2% of GDP.

India imports three things mainly – Crude Oil, Cooking Oil and Gold. The first two are essentials. Gold is considered to be Non-essential. So our Government wants to reduce the import of Gold. There are many shortfalls in this appeal.

We do not have a safe investment medium compared to Gold. As I mentioned above, it is so easy to buy and sell Gold. People do not trust the other alternatives. The increase in import duties and other restrictions, increase the scope of smuggling. It has already increased. The difference between prices in India and Nepal is 750 Nepalese Rupee per gram (which is nearly INR 468). Recently, 35 kg of Gold has been caught when it smuggled from Nepal into India. Pakistan’s gold imports have increased all of a sudden. Sri Lanka has mirrored India in the Imports Duty rate due to fear of Smuggling.

I read another interesting perspective a few days back. If the investment in Gold goes down, the consumption in Economy increases. It leads to higher liquidity in the economy. The inflation goes up. This is mainly due to the lack of investment interest in other alternatives.

In the short run, Government should aim for decreasing other non-essential imports. Here are values (in Rs. Crore) of some of the non-essential imports published in the Economic Times 2 days ago. Apples: 1152, Booze: 1150, Cashew: 5433, Dolls: 431, Mobile Phones: 25835, Spectacles: 366, Cosmetics: 2173, Almonds: 2105 among many others. Government should try and increase the domestic production of these goods. It could create employment, curb imports and boost exports.

Increase in Gold Imports has been a trend over the past few years and stopping it all of a sudden is not possible. Government should try and create alternatives for Gold in the long run. Otherwise, people are not going to stop buying Gold just because the Finance Minister is saying.

Happy Reading!!!

P.S: Though I have referred many articles for writing this post, the main reference is a RBI report on Study ofIssues related to Gold Imports. You will find many informative data and graphs in this report. If you want more insight, read this report. The URL is

August 12, 2013

4 and Growing! Thank you once again!!!

Hi Guys,

Birthdays are always special and I actually feel my blog’s birthday more special than my Birthday! Maybe, because it’s my creation.

4 years – 212 posts – 132000 + views. This is a short snapshot of my blog stats. When I started my blog, I never dreamt of achieving these things. I thought it was just a hobby. I thought it was just fun. I never thought I could sustain it for this long. I never thought it would become a passion.

Thanks to each and every one of my readers for supporting my blog. You believed in me, more than what I believed in myself. The amount of confidence you guys instilled in me was a great source of energy.

Things have changed over time. I no longer write blogs sitting in front of my Desktop at home. I write in my Laptop sitting in my Hostel Room or at my college’s Resource Centre. I am no longer a student of Mechanical Engineering. I have become a Mechanical Engineer and a student of Management studies. I no longer write whatever comes into my mind. I have to think long about the consequences before touching on a post – one of the reasons, the number of posts have shrunken. The typical work filled days of B school life are also a reason for the reduction in number of posts.

A lot of people come and ask me, ‘Karthick, how did you get so many visitors?’ I wish I knew the answer. As I said in the beginning, I never dreamt of something like this. It has been a puzzle as to how it happened. People think I hide secrets. The reality is that there are no secrets. Many people ask me for tips on writing and it’s another question for which I do not know the answer. I myself consider I have a lot of scope to improve. Of late, I realized that I have become too complacent. For some time, I was not even proof reading the posts after the first draft. I realized it after a few comments and now I try to proof read twice before posting.

Looking at my posts in the last year, I am quite happy. Though the number of posts I have written has reduced to 30s, the content has been quite good. I have written posts relating to some Social issues. I was one of the Runner Ups, in a contest organized by Indiblogger and Surf Excel for writing about Corruption (you can see the badge at the bottom of the blog). It really feels good when people come back and appreciate for such efforts. I have written few book reviews and as a result, I receive requests for Book reviews in times of new releases (I haven’t accept any one so far as I cannot promise to write at the time of release). I receive requests for writing in other websites. It is quite startling.

I hope to continue writing good posts in the future and I hope my readers get something by reading my blog.

Over the past, I have thanked all my supporters over my Birthday posts and I do not want to mention all the names again. A big thanks to each and every one of you! I am posting the links of my previous Birthday posts, so that new readers can enjoy reading them.

At this juncture, I welcome suggestions for my blog. I know there is a lot of scope for improvement. Do let me know your suggestions on my writing or the content or the design of my blog. Write a comment or drop a mail to

Thank you very much for your support! Keep Supporting!

Happy Reading!!!