From The Indian Express, New Delhi
Sunday, December 2, 2012

http://www.indianexpress.com/news/-being-tough-on-gold-imports-won-t-wor...

MUMBAI -- Two former governors of the Reserve Bank of India warned Saturday against taking tough measures to rein in gold imports -- a major reason for the persistently high current account deficit.

The chairman of the Prime Minister's Economic Advisory Council, C. Rangarajan, said steps like banning gold imports would only push up its smuggling.

Rangarajan, who served as RBI governor, said there are already indications that illegal shipments of the precious metal have gone up in the last three months after the hike in the excise duty.

"That is an indication of how much gold is being smuggled in. I would say to some extent we should dissuade people from holding an asset that does not give a rate of return. However, you can't go beyond a particular point," Rangarajan said here at a function organised by the Indira Gandhi Institute of Development Research, an institution set up by the RBI.

Former governor Y.V. Reddy said, "If Mercedes Benz and aftershave lotion can be imported, why not gold? It is both an investment and consumption good. Many people seem to mistake that it is only a hedge against inflation. There is a demand for it. It is being imported. If you can, try to stop it."

The RBI Governor D. Subbarao said the central bank is "concerned about gold as means of saving because it blocks off savings."

"We are concerned about gold ... lending against gold by non-bank finance companies because of financial stability concerns. We have been concerned about gold from an external management perspective because of the pressure it puts on the current account or the capital account depending on your account for it," Subbarao said.

On growth and inflation, Bimal Jalan, Rangarajan's successor and Reddy's predecessor, said, "There are periods when growth is more important and you take policy measures to boost it. There are periods when you have to control inflation because that is the dominant public issue. So there will be periods when you take measures, however harsh they are, to control inflation."

Reddy added household savings, which was an achievement until recently, is now the most critical challenge for the future. "The behavior of household savings indicates that they do not have faith in financial markets except banks. It is a bad sign."

Rangarajan said, "If what has happened in the three-year period of decline is reversed either because of a fiscal consolidation program or because of inflation coming down, it is possible to get back ... if not the 9-percent but the 8-percent rate of growth."