By Rakesh Neelakandan
India's insatiable gold appetite is in a way leading the nation to usher in Foreign Direct Investment in defence, pharma and telecom!
Let me explain: India's gold imports are leading to a widening of CAD or Current Account Deficit?the difference between outflows and inflows of foreign currency?and is giving its finance minister sleepless nights. The other partner in crime, crude oil imports; the commodity being an essential commodity, cannot be curbed.
The only way to contain Current Account Deficit (CAD) is to increase the domestic production of oil & coal and restraining the consumption of gold, said the Union Finance Minister P. Chidambaram recently.
Finance Minister's aversion to gold looks to be of recent origin.
?India does not produce an ounce of gold. You pay in rupee, but the government has to spend dollars to buy gold,? Chidambaram had said to The Times of India. ?I do not buy gold. To think that gold is the safest investment is wrong.?
(This may partly explain why India is not going aggressive on exploration activities in gold!)
The Current Account Deficit of India stood at 5% of GDP in 2012-13 and was seen reaching 6.7% of GDP in October-December quarter.
Chidambaram said that the extent of CAD and its financing are the two major concerns. He said that it is important to finance CAD than to draw from the reserves.
Now, how would you finance the CAD and even add to foreign exchange reserves.?
There are two options:
As a short-term measure, one may promote FII or Foreign Institutional Investments in debt and equities. However, with the Quantitative Easing measures in US looks set to tapering, there is a capital flight from Emerging Markets like India. This is significantly contributing to Rupee depreciation.
The other route is FDI or Foreign Direct Investment in selected sectors. Currently, telecom sector has 74% cap in FDI and so also with broadcast sector. Defence sector is however closely guarded and attracts a cap of 26%.
On July 1, India's Prime Minister Manmohan Singh would convene a meeting of the respective ministers on raising caps. The outcome of the meeting remains unpredictable. However, widening CAD and behind it, the expanding gold appettite are also elements in forcing an FDI rethink.?
Meanwhile, authorities expect a moderation of gold imports in June as various curbs on gold take effect.
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