July 6, 2012

Fact: A substantial amount of trade deficit of India is due to excessive import of Gold. According to the data available, the annual import of gold in 2011-12 is supposed to have crossed 900 tonnes. Observation: 1. The government is upset that in spite of imposing duty on gold, people continue to buy gold. Demand for gold is inelastic. 2. It takes away the financial savings. Instead of savings is used for investment in the creation of other assets, it gets locked up in an unproductive asset. 3. People believe that gold is a better hedge against inflation. The interest on the various savings deposits, currently yield returns, which also is taxable, is much lower than the actual inflation rate. 4. Gold is real money and can be converted into cash anytime. It has value all around the world. 5. Also, Indians think that having gold with them gives a psychological boost. 6. Unlike other financial products, Gold makes people emotionally secure. 7. If the government wants money to be routed to production sector they must control inflation first.

Fact: Government borrowings may come down this year says the Indian department of economic affair. Observation: 1. Mr. Pranab Mukherjee said the government borrowing will be at 4.79 lac crore (4.79 trillion rupees) for the financial year 2012-13. In addition with cash management requirement at 90000 crores, the total borrowing is expected to be 5.69 crore. 2. This is based upon the assumption of the GDP growth rate to stay at 7.6 percent, WPI at 6.5% 3. Industrial slowdown is underway. Monsoon is way below par. Service sector is growing rather slowly. Foreign agencies are predicting an Indian growth rate for FY 2012-13 not exceeding 5.8 percent.

4. Selling PSU, the government hopes to bring in 30000 crores. They will be lucky if they raise 15000 crores.

Given all this, it will be very difficult for the Indian government to bring down its borrowing. Let us wait and see.