RBI is rightfully worried of the ballooning Current Account Deficit. CAD  impacts markets , exchange rates, inflation and so on. CAD increase from 1.3 % of GDP in FY’08 to 5.4% in July- Sept- Quarter of FY’13 is really shocking. At absolute level in a  growing economy like ours it’s really damaging the economy at all fronts; in terms of increasing input costs,low  investment activity,high  inflation, increasing unemployment ,  higher deficit etc.

Scams and Corruption management under Dr Singh”s leadership has failed to tackle this menace for a long time and policy paralysis has ultimately taken its toll on all major fronts of our economy. Steeper decline in exports compared with  imports have led to the widening of the trade deficit. One may argue , since export is dependent on consumption level world wide and as the major economies around the globe are in the lack luster mode exports from India has impacted and hence the decline on export front.

But on the Import front what is largely leading to the CAD is the import of Gold on a large scale even though india’s growth story is not that impressive any more . Who is importing this gold. Not the productive class for sure. Since our economy is already ridden with the parallel economy to the tune of around 40% of our GDP, accompanied by large scale loot of government revenues through loot of natural resources by scams and corrupt practices, it would not be wrong to think that gold import is being used to launder this ill gotten wealth increasing demand for dollars . Gold holding policy must change. In the absence of effective law to plug the loophole on gold holding citizens are having a free ride to launder ill gotten wealth. Those who can’t do round tripping through tax havens for money laundering are finding gold purchase an easy way at hand. RBI had to intervene to cut gold import. Dr Singh’s government too must respond through policy initiation on gold holdings that will reduce gold imports.

Agreed increase of Import duty on Gold will lead to smuggling. But rules and laws on inherited gold hold requires to be tweaked to prevent money laundering. Tax on agriculture income beyond the basic limit as in case of non agriculture income too must be levied to curb money laundering through gold purchase and wealth tax on gold holding beyond a reasonable limit should be increase dto discourage unproductive investment. Gold Import has become the major Dollar guzzler after oil and petroleum products which is worsening the ills of our economy.

CAD ills are not going to be over soon. If dollar demand for gold persists rupee will continue to  be weak ,imports costlier and rates decrease will not be as sooner as RBI expects. When rates are high overseas portfolio flows are bound to increase to take advantage of high rates. RBI ‘s contention that nearly two thirds of the deficits are funded by portfolio inflows and they are volatile is calling for urgent response.  Surely Dr Singh being an economist should respond quickly through appropriate policy on gold holding and save the meager dollar earnings of productive exports in these days when the external sector is not rosy,from guzzling away by the hoarders of ill wealth and speculators. Spare the economy from the avoidable ills of CAD Dr Singh ,our honest economist PM.