While record low oil prices have provided relief to the Indian government — which is struggling to reduce the current account deficit — soaring gold imports, have resulted in a sudden spurt in the trade deficit in October.

According to commerce ministry figures, released last week, the trade deficit went up to $13.3bn in October, up from $10.6bn a year ago. The deficit for the seven-month period (April-October) is slightly lower at $83.75bn as against $87.31bn in the corresponding period in the previous fiscal.

Ominously, gold imports shot up by a phenomenal 280pc in October to $4.17bn, from $1.09bn in October 2013. The deficit widened substantially despite a 19pc fall in oil imports to $12bn. Crude and gold are the two biggest import items in India.

India’s exports also fell by 5pc to $26bn — even as imports grew by 3.6pc to $39bn — with sectors such as engineering goods, pharmaceuticals and cotton yarn performing badly. Non-oil, non-gold imports also went up by 6pc to $22.9bn.

India’s current account deficit (CAD) fell to $32.4bn (1.7pc of GDP) in fiscal 2013-14, from a record high of $87.8bn (4.7pc of the GDP) in the previous fiscal, thanks to a contraction in trade deficit and an increase in net invisible receipts.

In the first quarter of the current fiscal, the CAD fell to $7.8bn (1.7pc of GDP) from $21.8bn (4.8pc) a year ago. In the second quarter though, it was up at $14.2bn. Analysts, however, expect the CAD to be lower at the end of the current fiscal.

An economist for Nomura India expects that the CAD would be contained at around 1.4pc of the GDP by the end of March 2015.

Citigroup, however, believes the CAD would be slightly higher than last year’s figure. “We maintain our view of FY15 CAD at $36.7bn (1.8pc of GDP), with risks balanced,” says a research note by Citigroup.

While admitting that exports could be weaker because of weak demand in Europe and China, the leading financial services group noted that India’s healthy foreign exchange reserves position (at over $315bn), combined with the promised reforms across several sectors would stabilise the Indian economy.

With the CAD unlikely to rise substantially from the level of $32.4bn seen at the end of the previous fiscal, the Indian currency is also expected to remain stable at levels of Rs62-63.

The CAD had shot up to $87.8bn at the end of fiscal 2012-13 following a spike in oil prices and soaring demand for gold. The government then imposed restrictions on gold imports by hiking the import duty from 2pc to 10pc. This had the desired effect as imports of the yellow metal slowed down, easing the trade deficit.

THE recent spurt in gold imports is, however, causing worries to the government which could tighten the curbs on imports of the yellow metal. India’s gold imports rose to 143 tonnes in September and topped 150 tonnes a month later on the eve of the festive season. Traditionally, gold consumption soars in India in September and October on the eve of Diwali and other festivals.

According to the World Gold Council (WGC), India regained its position as the world’s largest consumer of gold in the third quarter of 2014, overtaking China once again. During the July-September quarter, India bought 225.1 tonnes of gold in jewellery, coins and bars, as against 182.7 tonnes bought by China. India’s total gold consumption adds up to more than 900 tonnes a year.

Demand for gold jewellery shot up by 60pc in the quarter to 189.2 tonnes. With gold prices having fallen significantly in recent months, consumers went on a buying spree, hoarding up jewellery.

Government officials have been in talks with the Reserve Bank of India (RBI) about additional measures to be taken to curb gold imports. But officials acknowledge that increasing duty on gold imports could result in a spurt in smuggling.

Ever since the government imposed a 10pc duty on gold, there has been a significant rise in gold smuggling. Organised gangs deploy carriers who travel abroad and return home — mainly to the non-metro international airports — loaded with the yellow metal, which is concealed in their bodies or in their personal baggage.

The WGC estimates that about 200 tonnes of gold was smuggled into the country last year. But the authorities have also cracked down on the trade. The Directorate of Revenue Intelligence (DRI) has reported a 330pc increase in seizures; it made 2,150 seizures of gold worth Rs6bn in the first six months of the fiscal.

Earlier this year, the government eased curbs on ‘star trading houses’ — who export jewellery — to import gold directly. A ban had been imposed on these imports in July 2013 when gold imports had risen sharply.

The All India Gems and Jewellery Federation is opposed to the government introducing new curbs on imports. Last week, it urged the government and the RBI not to impose new curbs, which could ‘spell doom for the gems and jewellery sector.’

According to Haresh Soni, the federation chairman, the sharp increase in gold imports in Sep­tember and October was because of the low base effect. In September and October 2013, gold imports were low, but this year they have returned to the normal, pre-festive season levels, giving the impression that there has been a substantial increase in imports, he argues.

The federation has also asked its members to stop selling gold coins and bars, once their sale exceeds 300 tonnes as part of a self-regulatory initiative. It also wants the government to reduce import duty on the yellow metal to 2pc to reduce smuggling.

Published in Dawn, Economic & Business, November 24th, 2014