Big Swiss connection in gold rush to India
By Nantoo Banerjee
What is preventing the government to stop the wastage of billions of dollars in gold import even at the risk of throwing the country’s economy totally out of gear? Why is the government fighting shy of applying brake on gold import, which is eating away much of the Reserve Bank’s foreign exchange reserves built painstakingly with borrowed money, overseas aid, grants, foreign direct and indirect investments? Every week, tonnes of gold are entering India. Who are these imports benefiting?
Last month alone, gold worth US$ 7.5 billion was imported into the country by individuals and agencies. At this rate, India will end the current financial year with a gold import bill of $ 90 billion. And, if that happens, the economy will be devastated even before this government completes its five-year term and the nation goes to the polls to elect the next Lok Sabha.
The news of a $7.5-billion gold import leading to the biggest ever trade deficit of $ 17.1 billion in a single month – that too also in the very first month of the new financial year, 2013-14 – sent the stock market into deep depression. The sensitive index (Sensex) of the Bombay Stock Exchange immediately shed 431 points, the biggest single session loss in recent memory, and the exchange rate of Indian Rupee hit a two-month low after the government released the April trade deficit data. A simultaneous official release of lower food and retail index data failed to improve the market sentiment. India Inc. lost wealth in terms of market capitalization worth several lakhs of crores.
The gold import bill for April was higher than the country’s total defence import bill for the entire 2012-13. It is the second biggest after the petroleum import bill. Quite depressingly, the trend is continuing unabated for the last three years with the government sitting practically idle over the economically undesirable development.
The massive gold import is serving none except the rich, tax evaders, money launderers and Swiss gold traders. It is stalling development projects for the country’s 400 million poor, weakening Rupee, exposing the country to further foreign borrowing, depleting RBI’s forex resources and affecting India’s sovereign rating. RBI’s foreign exchange reserves are hardly at a comfortable level if compared to the combined impact of India’s current account deficit, foreign borrowing, including short-term debts, and the annual debt-servicing cost.
Incidentally, India’s foreign exchange reserves fell to $294.76 billion as of April 19, from $295.25 billion in the previous week. The foreign currency assets include the effect of appreciation or depreciation, other currencies held in its reserves and its Reserve Tranche position in the International Monetary Fund (IMF).
One also has to take into account the quality of our foreign exchange reserves, a good part of it is in investment in stocks by foreign financial institutions (FIIs) which could act as ‘hot money’ and devastate the market and the economy in case the country is ever faced with a payment crisis.
RBI’s hard currency reserves include $23 billion, which FIIs invested in the secondary market in 2012. The cumulative investment by FIIs in the country’s equity market at the end of 2012 stood at a whopping $125 billion. A panic pullout by FIIs in the face of a currency crisis could destroy the market, corporate confidence and economy.
India’s economy is still not seen as a right choice for long term on-field foreign investment by overseas entities. The Unctad has recently reported that FDI inflows into India in 2012 actually dropped 13.5 per cent, from $31.5 billion in 2011 to $27.3 billion. In comparison, FDI inflows to China, last year, declined only 3.4 per cent to $120 billion.
At the same time, India’s external debt rose 8.9 per cent to $376.3 billion as of December 31, 2012, against $345.5 billion as of March 31, 2012, accounting for about 20 per cent of gross domestic product (GDP).
As of March 31, 2008, shortly before the crisis period of 2008-09, external debt accounted for 20.3 per cent of GDP. This rose to 20.5 per cent as of December 31, 2009. External debt rose faster than foreign exchange (forex) reserves, which provided a cover of 78.6 per cent to the external debt stock at the end of 2012.as against over 85 per cent at the end of March, 2013.
There is concern on the low forex cover for external debt. Till 2009-10, forex reserves covered the entire external debt. Even in the crisis period of 2008-09, when capital flows from the advanced world dried, India’s forex cover to external debt stood at 112 per cent. As on December 31 2012, the ratio of short-term debt to forex reserves was 31.1 per cent, compared with 26.6 per cent at the end of March 2013. Short-term debts are always dicey. The ratio of concessional debt to total external debt fell from 13.9 per cent as of March-end to 12.5 per cent as of December-end, showing the increasing share of non-government debt. At the end of 2012, government external debt stood at $81.7 billion, against $81.89 billion as of March-end; non-government external debt rose from $263 billion to $294.60 billion.
Thus, India’s hard currency stocks with RBI and the quality of those assets are hardly comfortable to indulge in such large private gold imports year after year. It seems India’s gold import policy is being dictated by a bunch of aggressive bullion traders in Switzerland and the USA. If such an apprehension proves to be true, it has the potential to become the biggest financial scandal ever involving some of the top economic decision makers in the government. [IPA]