MBA Aspirants are expected to know on what is new in economy and what is that impacting it? Today, you will read on How does gold affect the GDP?
Before looking at the correlation between gold and the gross domestic product (GDP), it is important to understand what GDP is and the factors that lead to its fluctuation. GDP is the best measure of a country’s economy.
GDP, in the simplest terms, measures the country’s total output, and this includes everything that the country produces. The components of GDP are personal consumption expenditure, business investments, government expenditure and net exports (which refers to exports minus the imports).
Now that the definition and components of GDP are clear, it will be easier to understand how gold affects the GDP of a country?
India is the largest importer of gold in the world. So, when India’s import value increases, the net export value falls, and this eventually leads to a decline in the GDP.
Also, many Indians have the misconception that they are purchasing gold in rupees. This is not true. Since gold is imported, consumers of gold are essentially selling the Indian rupee in exchange for gold, which is in foreign currency.
So, in the process, by sending Indian rupees overseas, Indians are disrupting the balance of money entering and leaving the Indian market, resulting in the depreciation of the rupee. And once the value of the Indian currency falls, imported goods become more expensive, and this makes it difficult for large corporations and business to repay international loans.
So, the purchase of gold is not a simple matter of exchanging rupees for gold; the entire economic chain gets affected along the way, which most people are oblivious to.
Today, India’s current account deficit, which is the net outflow of money, stands at 5.4 percent of the GDP and this figure will go up if money keeps flowing out of the country.
In fact, India’s current account deficit is twice as much as economists’ recommendation. A widening current account deficit is detrimental to the growth of an economy, which is why India’s Finance Minister P Chidambaram has been urging and appealing to the Indian public to resist the temptation of buying gold.
To prevent people from purchasing gold and putting pressure on the Indian economy, the Indian government raised the import duty on gold from 4 percent at the beginning of this year to 10 percent step by step.
And now, the government has increased the import duty on gold to 15 percent. To reduce the current account deficit and increase the GDP of our country, it is important to reduce imports.
And India imports three things mainly, and they are cooking oil, crude oil and gold. The first two commodities are necessities whereas the third is a luxury, which is why the government is taking extreme measures to reduce the import of gold.
These measures undertaken by the government have proven to be effective; gold imports have fallen from Rp 135 billion (US$ 2.2 billion) in July to Rp 40 billion (US$ 650 million) in August.
It is hoped that these measures continue to keep the import of gold at a low level, and boost the GDP and reduce the current account deficit. Only then will the Indian currency appreciate and stay competitive with the rest of the currencies.
Imports have a significant impact on a country’s GDP, and it is particularly so with gold because of the obsession that the Indian market has with this commodity.