Current account deficit-watchers are ecstatic about the collapse in gold imports?from 205 tonnes in Q3 2011 and 338 tonnes in Q2 2013 to a mere 85 tonnes in Q3 2013?since this has helped shrink the CAD dramatically. Indeed, if India?s FY14 CAD is to be the $56 billion estimated by the RBI Governor?$32 billion less than last year?it will largely be due to the sharp compression in gold imports.
The question uppermost on everyone?s mind, therefore, is whether the compression is for real. Have Indians suddenly decided the price of gold is too high and that incremental savings will instead be put in bank deposits or mutual funds? If not, apart from people selling their existing gold to take advantage of the higher prices?at 61 tonnes, recycled gold in Q3 has never been higher?is a substantial part of demand actually being met by smuggling? No one knows, and though the number of customs seizures are up, it is impossible to say how much of smuggled gold is getting caught. Certainly, there is suspicion enough for the RBI Governor to mention this in his speech a few days ago. Even the World Gold Council, while talking of lower demand this year, has mentioned that gold smuggling is on the rise. If so, the puzzle is how it is being financed. The traditional method of financing, through showing lower service sector imports, is a possibility but even these have picked up of late, albeit only marginally.
