Trade Deficit Woes: Ajay Kedia Calls For Separate Industrial Versus Investment Demand Of Gold, Silver

Gold and silver had driven India’s trade deficit wider in October, through an extraordinary jump in the imports of these precious metals.

To manage the significant impact of gold and silver imports on the trade deficit, the government must clearly segregate investment demand from consumption demand in precious metals, according to Ajay Kedia, director of Kedia Advisories.

Gold imports soared 199.2% in October, touching $14.7 billion as compared to $4.9 billion in the same month last year. Despite high international gold prices, India saw strong festive buying consumer demand ahead of Deepavali, contributing heavily to the surge.

Kedia pointed out that the current import figures for bullion are reminiscent of 2014, when the country imported nearly 1,000 tonnes. "It is a non-productive import as it's not like an electronic item, oil or something that is consumed."

Kedia noted the government's current efforts to promote financial instruments over physical assets, suggesting this is the right strategy to manage the trade gap. "This is why the government has come up with the idea of consumption in Gold like Sovereign Gold Bonds and mutual funds," he explained.

By redirecting pure investment capital into financial instruments like SGBs, the government can reduce the need for physical importation, thereby providing relief to the high import numbers, he said.

The value of high imports seen in October, he believes, "will be neutralised in the next couple months".

While silver’s industrial use as a base for electronics, driven by continuous demand from sectors like data centres and semiconductors, which is essential and will continue, Kedia notes that the overall bullion import number is inflated by traditional consumer buying.

"The major chunk of demand is from the industrial side but there is now more demand from the ETF side, that this is a new scenario that has been building," he said.