THE SENIOR ANALYST
has emerged as safe bets. Though gold is an
investment, it does not bear any fruit for the
Indian economy. Parking money in this precious
metal slows down economic growth by squeezing
out money of the system. Surprisingly, oil imports
inspite of adding to the trade deficit enhances
industrial growth. Meanwhile, a growing trade
deficit leads the country to devaluation of
currency which drives away foreign funds out of
India. This in turn results in less investment and a
vicious cycle is formed.
What’s the big deal with CAD?
If a country exports more than it imports then it
will have a current account surplus. E.g. a country
like Germany and South Korea produces a lot of
things that the rest of the world would need than
it would need from the rest of the world, on the
contrary countries running a deficit on the
current account i.e. those who need more things
from abroad than they can sell to the world have
the problem of funding this deficit from an
external source.
Now USA also has a high current account deficit,
but since all international payments of US are
made in dollars it can print the dollars to make
for the shortfall and thus can afford to have a
high current account deficit .India however,
cannot make its payments in Rupees and thus it
needs to borrow dollars from an external source.
If my import bill is $60billion but I can raise only
$40 billion through exports then I would need
additional $20billion being funded from outside.
This can be done in two ways
A)RBI sells its dollar reserves- When RBI sells its
dollar reserves it will buy Rupee from the bank
and thus business will have the access to the
extra dollars that it needs for funding the import
balance.
Jan 2014
Gold a major contributors to CAD
Gold contributed significantly to the current
account deficit. In August the government used
measures to curb the incessant consumption of
gold by Indians by increasing the import duty on
gold by 10%, and of jewellery to 15% and by
announcing a total ban on gold coin imports. This
helped the gold imports to come down to $3.8
billion from a mammoth $16billion and
miraculously helped the CAD to come down from
$21.7 billi