Facts ‘N’ Figures: Gold buying responsible for India’s yawning account deficit

A massive appetite for gold across India is causing the country’s account deficit to widen, with most of the South Asian nation’s gold demand met through imports, a new study by Macquarie Economics Research says.

“Adjusting India’s [U.S.] forty-four billion [or three percent of gross domestic product this fiscal year] current account deficit with net gold imports, the overall deficit would reduce by almost half, to twenty-one billion [or one percent of gross domestic product],” Macquarie analyst Tanvee Gupta Jain wrote in a Nov. 29 report. “Our estimates suggest that net gold imports alone contributed nearly forty basis points to the one hundred thirty basis-point widening of India’s account deficit between fiscal 2008 and fiscal 2011.”

In volume terms, gold consumption in India – including jewellery and net retail investment – grew 5% year-on-year during 2011’s first three quarters “on top of seventy-two percent year-on-year growth registered last year,” despite a 64% cumulative gold-price rise in rupee terms from January 2010 to September 2011. 

Quoting numbers from the World Gold Council, Jain notes that Indians have the biggest gold holdings in the world at 11% of global stock, with households in the country owning 18,000 tonnes of the metal. 

The analyst estimates that between 7% and 8% of India’s US$329 billion in household savings was held in gold during 2010’s fiscal year. 

As of September, India remains the largest gold consumer in the world on a trailing four-quarter basis, his report states, and the country’s rising gold consumption is one of the reasons why the rupee has depreciated by 18.6% against the U.S. dollar since August. The country also has a yawning account deficit.

“While the weakening trend against the U.S. dollar is across the board,” Jain writes, “the Indian rupee has been the worst-performing currency in the Asia ex-Japan region since August.”

Of merchandise imports, only crude oil and capital goods surpass gold. In gross terms, the metal’s imports made up a 9.6% share of total imports this year. In 2010 92% of the gold supply in India was from imports, with the remainder coming from recycled gold and other sources. Jain reasons that buying gold is resulting in “imprudent use of foreign exchange earnings.”

Jain also makes the point that because Indian households have always preferred physical savings such as gold, land and houses over financial savings, “the flow of productive savings required to boost investments in the economy has been reduced.”

And a shift to financial assets will be difficult without financial sector reforms and long-term savings schemes and products, such as gold-price-linked instruments. Until then, he says, the flow of productive savings needed to increase investment in the economy will be extremely low.