In an extraordinary move, Prime Minister Narendra Modi has urged Indians to save foreign currency by postponing gold purchases for a year, avoiding foreign travel, working from home and consuming less fuel. Modi’s clarion call – which sounded twice in 24 hours – raised fears among consumers about fuel shortages and rising prices, while economists saw it as cautious macroeconomic policy to weather a potential balance of payments crisis led by the oil shock. Reducing discretionary spending on gold, which accounts for almost a tenth of India’s total import bill, would improve external balances, stabilize the rupee and preserve forex for essentials like oil. With benchmark crude oil prices hovering above $100 a barrel, the rising cost of imports threatens to widen the trade deficit and current account and further weaken the rupee, which touched a fresh low of 95.63 against the US dollar on Tuesday. Given this, Modi’s call for moderation in demand is perhaps indicative of the uncertainties ahead.
As it is, India is facing a gold supply shortage as shipments have been held back for more than five weeks, apparently due to administrative glitches. First, the government delayed authorizing the import of banks for 17 days in April. When the list finally arrived, port and airport clearance fell behind schedule. Finally, there is uncertainty regarding the GST exemption for precious metals. As a result, gold imports fell from around 100 tonnes in January to around 15 tonnes in April – a 30-year low, excluding the pandemic period. All this raised the question of whether the government was deliberately slowing down imports.
