Buzz over gold curbs: It's a bad idea, avoid

The chaos created by the demonetisation of Rs 500 and Rs 1,000 currency notes, that form nearly 85 per cent of all notes in circulation, sparked off several undesirable rumours. In fact, WhatsApp would have something new on these trying times flying around every 20 minutes. The latest “news”, that jewellers were stockpiling gold as they feared the government would soon ban the import of gold, did not really reflect the reality on the ground. A cross-section of jewellers say they have enough stocks of gold to meet any demand. Demand has dipped significantly recently, from an average sale of 200 kg in normal times to just 1-2 kg a day now. The reason is lack of liquidity in the hands of the consumer after the demonetisation. So there’s no need to build huge inventories. Even weddings have been postponed to early next year as the situation is expected to be more comfortable by then. The relaxation by the government, permitting some higher withdrawal limits in case of those with weddings in the family, won’t help very much, at least those planning big, fat Indian weddings.

The jewellers are, however, cautious and watchful, not altogether ignoring the possibility of an import ban. It is significant that customs duty on gold imports has been reduced to 4-6 per cent from 10 per cent. People are also selling gold and buying futures in the MCX, where the duty is much less, around 7-8 per cent. A significant number of jewellers have enough inventory and, if the situation worsens, can always recycle old gold jewellery. At present around 30-40 per cent of gold is recycled. Sales will be flat for just a month, and jewellers can cope with that. More important, from the socio-economic angle, a ban on gold imports would be extremely regressive as it would take the country back to the dark days of gold smuggling and the creation of mafia gangs to tackle illegal imports. It would be worse than prohibition as India is the second largest consumer of gold in the world after China. Imports have in any case been dropping, when compared to earlier years.

The government has various options before it. For instance, it could ban the import of gold bars and coins for a temporary period. On the positive side, it could limit the possession of gold with individuals and restrict the consumption of gold imports to genuine manufacturers. This would take some of the pressure for imports. A ban on gold imports would also lead to large-scale unemployment as this sector has a huge workforce, with most of them on contract. The government, which has already attracted negative publicity, wouldn’t like to add to public concern. It’s certainly a situation where you should wait and watch.