Five reasons why government doesn't want you to buy gold

Rising import bill: Gold is India's second most expensive import after crude oil. While oil accounts for 35 per cent of the import bill, gold imports contribute 11 per cent to India's trade bill. Crude is crucial for the Indian economy, but gold is a drain on resources. Simply put, the government has to spend precious foreign exchange for a commodity that is of little industrial value. Terming gold imports as "wasteful expenditure", Rajiv Takru, financial services secretary, said that India could not afford the current levels of forex spending on gold imports. Widening trade deficit: India is the world's biggest buyer of bullion. Gold imports by India surged to 162 tonnes in May -- more than twice the monthly average in the record year of 2011. Rising imports lead to current account deficit (exports minus imports), which is usually accompanied by depletion in foreign-exchange assets. The Reserve Bank has described high CAD as the biggest risk to Indian economy. Economic instability: Rising deficit is bad for India as it exposes the economy to the risk of sudden stop and reversal of capital flows. Foreign institutional investors have bought a net $15.38 billion (Rs 90,000 crore) worth of shares this year as of Wednesday's close, but have been selling index futures over the last four days. In case of an event shock, for example if the U.S. Fed withdraws its bond buying programme, there might be sudden outward flow of money, leaving India scrambling for dollars. The slowdown in the Indian economy has made the current situation even more volatile because the government is unable to generate heavy capital inflows. Rupee under pressure: The rupee is perilously close to its all-time low of 57.32. Having a currency at an all-time low is not a great advertisement for the government's management of the economy ahead of elections. If gold imports start to fall, the government will have enough dollars to shore up the rupee. Obstacle to development: Indians have for centuries relied on gold for savings. As banks have made few inroads into rural areas and consumer inflation is high, it remains the investment of choice for many. The government worries that large amounts of savings locked up in gold curtail liquidity and therefore investment in infrastructure and other drivers of the economy. .(With inputs from Reuters)

Five reasons why government doesn't want you to buy gold

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