Lavish luxury imports threaten to destabilise economy
By Nantoo Banerjee
The customs duty hike for the import of gold bars in the 2012-13 budget is too little, too late. The damage has been done. The government is concerned though it is not immediately inclined to take any drastic measure to curb gold import. In the government’s own admission, India has spent over US$ 90 billion in foreign exchange on import of gold in the last two years. The largest chunk – worth around $60 billion – would go on account of gold import during the current financial year ending March 31 alone. Add the other luxury imports, including alcoholic drinks, cars, perfumes, watches, pens, cosmetics, consumer electronics, furniture and home décor, i-pads, i-phones, high-end audio and video aids, high-spending Indians may have splurged $ 80-85 billion in hard currency in support of their lavish life-style during this financial year.
India has already become the world’s biggest gold importer. The country is also fast emerging as a top importer of luxury and high life-style products. These imports don’t necessarily contribute much to the GDP. Generally, they generate large tax revenue for the government and indirectly generate modest employment through their domestic distribution and sales network. They cater to a small section of the society while the entire nation bears the financial burnt for these luxuries meant for the rich and the deep pocket consumers.
The government and the Reserve Bank of India are now especially worried as the current account deficit (CAD) has sharply risen by over 20 per cent from 2.9 per cent in 2011-12 to be around 3.6 per cent of the GDP at the end of the next financial year. The current account deficit for the year could be as high as $68 billion. Both the agencies feel that such a high CAD is not sustainable and, if it persists, economy is bound to be hurt in the coming years. Rising international crude oil and gas prices are already making things worse for the economy. The US and European Union-imposed embargo on Iran’s oil trade, which comes into full effect from July, this year, may push up global crude price to extremely uneasy levels. India’s petroleum import bill during 2011-12 will most certainly exceed the $140-billion mark.
The latest available data suggests that during 2011-12 India’s foreign trade, pumped up by around a 30 per cent import surge, may touch the level of $ 470 billion. The export grew by only around 23 per cent, leaving a yawning trade gap of nearly $200 billion, which is $67 billion more than the 2010-11 trade deficit estimate. This is a matter of grave concern as international trade today accounts for nearly 53 per cent of India’s GDP.
Therefore, it is not surprising that barely within a week of the budget presentation, the union finance secretary, R S Gujral, is talking about the possibility of imposing tariff and non-tariff restrictions on certain specific imports, including gold and other luxury items and commodities, before it is too late. The RBI governor, D Subbarao, too is for a brake on gold import. However, a small hike in the import tariff alone may not immediately have much impact on imports of luxuries as the number of high-spending consumers is growing steadily year after year.
Gujral is on record to recommend: “curtail the current account deficit to the extent feasible because otherwise, India may face problems in the years to come. If we cross a CAD of 3.5 per cent (of GDP) next financial year, we need to see which imports can be curbed without impacting the growth.” Hope the union finance ministry does not wait for a full year to take the vital decision if the present trend continues even through the first quarter of the year. Experts feel that it would be difficult for the economy to sustain strong twin deficits – CAD and fiscal deficit. In fact, the budget projection of these deficits may go haywire if commodity prices stay volatile and rupee depreciates.
Although the frighteningly large spend on gold import has ultimately made the government sit up and take some action, the higher import duty on gold at four per cent from its pre-budget level of two per cent is neither here, nor there. Few are prepared to believe the Prime Minister’s Economic Advisory Council’s projection that the additional two per cent import duty levied in the budget would bring down gold imports to the level of $ 38 billion in 2012-13. It will be much more. Domestic gold traders and hoarders have tested the blood. One can understand the rich people’s craze for gold, but the government’s soft corner for the yellow metal and other luxuries is rather intriguing especially as the government represents predominantly the poor, the most enthusiastic and compulsive voter segment, who have lately become a pet subject of an official debate on their classification by daily spending capacity per person – Rs. 32 or Rs. 28.
Believe it or not, the current financial year’s gold import outstrips the country’s armament import by 1000 per cent for all the three services – the army, navy and air force. It is nearly two times the size of the government’s entire defence expenditure for the year. It is much larger than the recently passed railway budget. The value of imported gold surpasses the entire cost of the import of fertilizers such as urea, di-ammonium phosphate (DAP) and muriate of potash (MoP), steel and thermal as well as metallurgical coal. It is nearly equivalent of India’s current account deficit for the entire year.
The bitter truth lies in the paradox of Indian economy which is high on gold consumption and low on food production. The latest official data revealed that the annual per capita foodgrains availability had in fact declined by 1.23 per cent to only 160.1 kg. in 2010. In a way, this sums up the much touted official version of India’s inclusive growth story. (IPA Service)