Due to remarkably consistent high volumes from year to year, India's gold imports have the effect of a double-edged sword: the influx of gold puts tangible wealth in the hands of urban and rural dwellers alike yet makes the country's current account deficit (CAD) balloon larger and become increasingly unmanageable.
For fiscal year 2017, if gold demand in India reverts to more modest levels, the deficit is expected to be significantly lower.
As a result of seasonally high gold imports during October and November, the trade deficit during the second half of 2016 is already projected to be considerably wider than it was over the first half of the year. However, economists forecast that next year will bring a bit of relief to the deficit. It is projected to fall from $22 billion during FY 2016 to between $15 billion and $20 billion for FY 2017.
For the first quarter of the current fiscal year, the deficit grew by a relatively marginal $0.3 billion ($300 million). This was compared to rising $6.1 billion over that same three-month period a year earlier. It is a somewhat encouraging sign for the finance ministry that, although the deficit keeps getting wider, it has been growing more slowly.
On top of the impact that gold has on India's balance of trade, the country is also struggling with a cash shortage that is approaching crisis status. Prime Minister Modi made the surprise move to institute a swift elimination of large cash denominations from circulation. This policy has not been popular at all with the public.
For many rural Indians, access to everyday banking services is still largely nonexistent. There is a great deal of mistrust of banks in general among the country's poor farmers; the vast majority don't have a bank account at all. Most transactions are carried out in cash, or something else physical like gold.
The scrapping of large-denomination banknotes has made the situation even more precarious for families in India. Supply shortages and long wait times at ATMs are now the norm. This is even more burdensome on rural dwellers because of the long distances that must be traveled to exchange the worthless notes. Many observers have characterized the situation as "demonetization," which of course it is. New 500- and 2,000-rupee notes are supposed to replace the demonetized ones, however.
One more component of India's economic circumstance is the unexpected decision by the Reserve Bank of India to leave interest rates unchanged at 6.25%. Most experts believed that the central bank would try to temporarily boost the economy and relieve the money crunch by lowering interest rates. The move—or lack thereof—is indicative of the uncertainty about what path the Indian economy will ultimately follow.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.