Why RBI and GOI Wants to Keep Gold Imports in Check?

So, I am due for an article on Fundamental Analysis and I am working on the same. Meanwhile, let’s get our hands on one of the burning issues, why our govt. is trying so hard to keep gold imports down!

If I have to say in very simple words, the answer would be to not let the money rot and be engaged in something, which even though is a very good (That too, is subjective) investment instrument for some people, is actually not so good for the economy. Let me illustrate this.

Suppose you, by some chance, happen to own some 10 Crores rupees. Now, you fear investing in Stock market and the returns on savings account or fixed deposit is something which you really don't fantasize. You talk with your parents about the same and lo, they advise you to buy gold with whole lot of that money! You do the same, sit on it and wait for your turn to sell again when the prices go up, which, you were told , will always will!

Now, let's say we ignore the current situation of dipping gold price  and assume it does go up and you pocket a handsome profit of some 3 Crores!

Cool enough for you!!

Now, let's take another situation Instead of being the kind of person depicted in the first situation, you are an entrepreneur and willing to invest the money in opening, say, a mineral water factory which employs 100 people. You buy equipment for the same, hire some people from your area and start bottling water. And in the process you do get some really nice returns, say a clean profit of Rs.2 Crores after you have paid everyday and this goes on for years!

Now, in the second scenario, not only you made profit, you generated employment for 100 people and if you take into account their families, you fed more than 300-400 people and also bought machinery, which in turn must have provided somebody more employment! Actually, you contributed to the society! Money begets money and you, in the process, created and helped economy grow!

That my friend, is the reason why the RBI and the Govt. so wants to keep gold imports in check. The money which could have been gone into economy is now lying idle and this causes problems for any govt. more so in India where we are so in love with gold.

Let's do some serious thinking now.

Gold is the second biggest import item for India, after energy. In 2011-12, we imported $56 billion worth of gold. That is bigger than the total money India spent on education that year (And that includes everything level--schools to Post graduation). Apart from this $56 billion, we are also employing a good chunk of labor & resources for designing & selling jewelry. For a growing economy, this statistic is simply unacceptable. 

At this stage of development, India should be using the money to buy machinery, build infrastructure, spend on education and create enterprises. Instead, a huge chunk of our money is wasted on an item that sits in people's lockers. 

I'm not against gold as an investment actually, but what India has is a gold addiction. We are spending a big part of our wealth on gold, instead of employing that money in growing our economy.

The RBI and the Govt. recognize this and that's why they are trying to block the imports by raising taxes. In fact, if you see the gold imports in past few years, you will know why they are so worried.

We should be, too!