Indians have temptation towards GOLD. The ancestors used to say to buy gold on regular intervals for daughters/sons marriage. By this way GOLD is purchase and such money is blocked. India is the world's biggest gold importer, soaking up a third of the world's supply every year. Gold Import is in second number after oil Import.
Our Current deficit is double to what our economist expected. Because of this reason Chidambaram said "If for one year there are no gold imports, it will change the current account deficit story of the country,"
The domestic production of gold in India is minimal. India meets the high demand of gold from its domestic consumers by importing it.
The first major problem the Indian economy faces with this high gold consumption rates is the increasing current account deficit (CAD). India has to pay for its gold imports using its foreign exchange reserves.
Foreign exchange reserves hold a key especially among the developing countries, which have to import and use the industrial metals. Higher consumption of industrial commodities supports industrial production. The goods produced by consuming such commodities can be exported and the revenues can be used to fund the current account deficit. Even during its higher prices, the demand for gold did not go down. The oil imports are a huge burden on India's balance of payments. But oil consumption is something which India cannot reduce keeping its industrial usage in perspective. High gold imports and weak rupee have been the biggest stress points when it comes to narrowing the current account deficit.
Misallocated capital is the second problem faced by the Indian economy due to its gold rush. Keeping the consumption aside, physical gold (mostly jewellery) is also considered as an investment among Indians.
Indian has no other option but to invest in gold. Because there are many reasons for this. People have lost their interest in equity markets. Government has been failed in luring investors for Equity markets & mutual funds.
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