News: Import gold in large quantities

(FPJ 15/02/2007) Mumbai - A major part of the annual budget relates to the country's foreign trade. We receive foreign exchange from tree major sources-exports, foreign investment and remittances by NRIs. This inflow has to be balanced against an outflow which also takes place through three routes-imports, outward FDI by Indian companies such as the acquisition of Corus by Tatas, and purchase of dollars by the Reserve Bank of India for increasing our forex reserves.

These total inflows and outflows have to be equal to each other just as the water entering a canal from a barrage has to be equal to the water going out in the minors. The Finance Minister is the gateman who can open one gate and close another but he has to make sure that the inflow is equal to the outflow. He can make policies to increase outward foreign investment by allowing individuals to make investments abroad such as buying shares in the New York Stock Exchange; but in the same breath he has to reduce the outflow of dollars by some other route such as by asking the RBI to desist from purchase of US Treasury Bills to augment our forex reserves.

The Finance Minister has recently reduced import duties on cement and refined oils. This will lead to higher outflow of dollars for the import of these items. But this will not lead to more total imports because there will be fewer imports of other items such as fertilizers. The Finance Minister is, so to say, holding a weigh balance in his hands that has three cups on each side. He can adjust the weights in the cups as long as the balance is stable.

There is a large inflow of dollars presently from foreign investment in our share markets as reflected in the buoyant Sensex; and from remittances by NRIs which has crossed the level of $20 billion and is almost equal to inward foreign investment. The basic problem facing the economy is how to send these $40 billion out of the system. The purchase of dollars for increase in forex reserves is likely to be less. We already have reserves adequate for about 15 months of imports.

Accumulation of larger amounts is not beneficial since we earn low rates of interests on these holdings. Acquisition of foreign companies by Indian businessmen is largely outside the hands of the Finance Minister. An enabling framework has already been put in place. The option before the FM is to allow outward investment by individuals, say, for the purchase of shares in the New York Stock Exchange or for the purchase of property in London. The FM can take a bold action in this direction and allow the same in small amounts. This will be a step towards full convertibility which may come later.

The balance dollars have to be necessarily sent out through higher imports. The option before the FM is to encourage imports of some items and discourage imports of other items. The FM can determine whether the country will import more cement or fertilizers as long as the total imports are sufficient to suck out the excess dollars. This will necessarily impact domestic industries adversely.

Higher imports of a commodity will necessarily mean less domestic production of the same just as the cooking done in the kitchen is less when TV dinners are brought in larger numbers. Thus Assocham and CII have demanded a reduction in excise duties from 16% to 14% in tandem with the reduction of the import duties to enable domestic industries face the competition from cheap imports. They are demanding a level playing field. This demand is entirely justified.

The difficulty is that this does not solve the basic problem of removal of excess dollars from the system. A reduction in excise duties will lower the cost of production of domestic industries, lead to fewer imports and add to the indigestion of excess dollars coming into the system. It will lead to less outflow of water from the canal system and lead to overflow and catastrophe everywhere. The need is to find something to import that does not hurt our industries. That will lead to less pressure on imports of other items and domestic industry will stand protected.

My suggestion is that the FM should create a large fund to import gold in large quantities. Alternatively, he could encourage RBI to do this. The US government holds huge stocks of gold at Fort Knox. We should do the same at Fort Amer of Jaipur. The purchase of gold will have two beneficial effects.

One, it will suck out the excess dollars and reduce the pressure on imports across-the-board. Two, it will help us preserve the national wealth within our borders. Our reserves will not stand the danger of devaluation because of decline in the value of the dollar, for example. The FM may increase customs duties for generating revenues for this. That will provide double protection to domestic industries without hurting the domestic manufacturers of cement or edible oils as happening presently. The Free Trade Areas being established with various countries may be a hurdle here. They can be amended suitably. Or the import duty on import of gold by individuals can be reduced to encourage private imports. The main point is that imports of gold do not hurt our economy in any way yet suck out the excess dollars.

The direction of imports can be bettered. The reduction of customs duty on cement and edible oils is not good for the country even though it may help in reducing the rate of inflation in the short run. The domestic supply of these commodities will not increase unless price is allowed to rise. By allowing cheap imports, we are discouraging an increase in domestic production and fostering import dependence. That will be harmful in the long run. Instead the FM should encourage imports of items that do not conflict with the domestic industrial activity.

We could import more phosphate fertilizers. We could provide an import subsidy on straw and other animal feeds. That will lead to more generation of milk and organic manures and help preserve our food production and food security. We could provide import subsidy on uranium and other nuclear fuels. The government must put in place a system of providing `technology-subsidy' on imports of frontline technologies along the lines of capital subsidy scheme of the yesteryears. More imports of oil would also be good.

Plentiful supply of LPG will provide easy fuel for our rural people and help conserve our forests. The demand of the Chambers of Commerce for reduction of customs duties on components and raw materials is also justified. The basic point is to increase imports of items that do not conflict with our domestic industrial activity.