Provide Incentives for Investment in Financial Assets to Discourage Gold Imports: C Rangarajan.

NEW DELHI: India's massive gold imports that are fuelling an already bloated current account deficit have drawn concern from the country's top policy advisory body. The C Rangarajan-headed prime minister's economic advisory council (PMEAC), in its review of the economy, has suggested more incentives for investments in financial assets to discourage gold purchases in the country.

Despite high and rising prices, gold imports rose 54% in April-December 2011 to $45.5 billion against the year-ago period. Heavy gold imports have contributed the most to the spike in the current account deficit which is likely to be 3.5% of the GDP in 2011-12, against 2.6% in the 2010-11 fiscal.

"The idea should be to develop conditions to divert people from gold," said a person familiar with the report that will be released on Wednesday.

The report also stresses on ramping up coal production in the country to cut dependence on imported coal, which could also add to the current account deficit problems.

Gold, termed a dead asset, has always been part of India's tradition and culture and Indian households are estimated to hold as much as $950 billion worth of yellow metal, according to a report by a global research firm Macquarie.

It may be a tough task to dissuade Indians from buying gold but what has caused the spike in the demand is the rising trend of gold as investment. India's total investment demand of gold bars and coins, according to the World Gold Council, has spiked to 366 tonnes in 2011 from 136 tonnes in 2009. In the same period total gold demand has risen to 933 tonnes from 578 tonnes.

Rising prices of the commodity, over 60% in dollar terms in the last couple of years, has failed to dampen people's appetite to buy it but has bloated country's import bill causing unease among policymakers.

The current account deficit is expected to be around $160 billion in the current year. Gold imports are pegged at nearly $60 billion.

"Gold imports alone contributed nearly 40 basis points to the 130 basis points widening in India's current account deficit between FY'08 and FY'11," a November 29 Macquarie report said.

Widening current account deficit and global uncertainty has put pressure on the rupee that has depreciated nearly 9 % against the dollar over the last one year despite a surge in the new year.

The ballooning deficit and depreciating rupee prompted urgent action and the government raised import duty on gold to 2% of the value from 300/10g to temper imports, but experts say India needs to do more.

"Budget should devise a scheme to convert physical holding of gold into financial savings through banking network. A limited period tax incentive can create desired push," says Nilesh Shah, president-corporate banking, Axis Bank.

"Conversion of Gold into financial savings is of utmost importance as it has multiple positive effects on current account deficit, currency, savings, investment and GDP growth," he adds.

According to panel report coal could also create current account worries as India imports nearly 70 million tonnes of coal in 2010-11 because of inadequate local production despite adequate reserves. However, the prime minister's office is taking active interest in the sector to boost production.

Source : economictimes.indiatimes.com