The accompanying chart gives support to recent analysis from Citigroup indicating that India should be able to keep its current account deficit (CAD) at around 1 per cent of GDP in the current fiscal year because of low crude oil prices and government action to curb gold imports.
The analysis puts India’s CAD at $20.6bn in 2015/16 against $28bn from a year earlier. Given the extent of India’s crude oil imports, the continued slump in global prices has narrowed the gap between of country's imports and exports - but there's another culprit.
Gold has traditionally played an important role in Indian society, particularly in rural communities, where many Indians don’t have practical access to banking facilities. Indeed many farmers believe that the country’s existing financial system is stacked against them, with consumer price inflation higher than benchmark interest rates and government bond yields. Physical gold, as opposed to gold-caked derivatives, is widely accepted without any documentation, thereby by-passing the plethora of red tape that typifies financial transactions in the country. It also provides an effective way to store wealth without paying tax.
