How too much gold is a drag on India's economy

The India-gold love affair is now facing a close scrutiny from the government. The budget has doubled import duty on bullion and non-standard gold to 4% and 10%, respectively, and slapped a 1% cess on unbranded jewellery. FM's message is clear: reduce gold's allure and head off Indians to other investments.

For, too much gold is a drag on India's economy. Here's how:

The BIG Hoard - 20,000 tonnes

According to the World Gold Council, that's approximately how much gold you'd find if you put together the store of individuals, institutions and the RBI at the end of 2011. Of this, 933.4 tonnes were added last year. Valued at Rs 27,000 per 10 grams, this stockpile is worth roughly Rs 54 lakh crore, 60% of the nominal GDP of India in 2011-12. Only a fraction, about 557.8 tonnes, is held by the RBI and constitutes 10.5% of India's forex reserves.

But We Don't Use Most Of It

2:1 is the ratio of gold to gross domestic capital formation. Had Indians bought more goods and services instead of gold, capital formation (economists' term for fresh investments) would have been higher than Rs 26.92 lakh crore for 2010-11. How? Higher demand would push companies to expand capacity or invest in greenfield projects to build some items they currently import.

And Gold Doesn't Work On Its Own

6.8:1 is the approximate ratio of the value of gold holdings to financial savings of households. Investments in financial instruments such as fixed deposits, insurance and equities release funds for productive activities by both the government and corporate sector. Gold does nothing but idle in safes or bank deposit boxes.

Yet, even though gold prices soared, household purchases did not decline proportionately. Instead, financial savings took a hit, falling to Rs 7.68 lakh crore in 2010-11 from `8.35 lakh crore in 2009-10. Inadequate banking infrastructure is to blame too: most of rural India cannot access financial instruments and has no choice but to buy gold as savings.


 

Gold is the third largest component of India's import bill beaten only by crude oil and capital goods. Crude keeps the economy running and capital goods help produce other goods, build infrastructure and keep growth rolling. But gold's contribution to the economy is minuscule. Yet we spent $33.9 billion in 2010-11 to meet 92% of the gold demand. This year, the bill is likely to inflate to $58 billion, according to estimates of the Prime Minister's Economic Advisory Council (EAC).

 

 

Gold Also Further Skews Numbers That Matter

Gold Imports as a % of GDP

1.7 in 2008-09

2.1 in 2009-10

2.0 in 2010-11

3.1 in 2011-12

12% is the estimated proportion of gold in the current year's import bill of $479 billion. The trade deficit is likely to be $175 billion. If we imported less gold, the trade deficit would be less ugly. As a result, the current account deficit would have looked better and reduced depreciation pressure on the rupee. Import of gold also leads to imprudent use of foreign exchange earnings. A Macquaire Research report says the country's net gold imports widened the current account deficit by 40 to 130 bps between 2007-08 and 2010-11.

So Will Import Duties End India's Love Affair With Gold?

Unlikely. The World Gold Council believes there may be a very short-term impact on demand. In the long run, this increase will not matter. This is because the fundamental reasons for buying gold jewellery, rooted in Indian culture and weddings, remain unchanged. The demand for gold as an investment, driven by the need to protect against inflation, ease of liquidity and as a monetised asset to secure loans, will also be unaffected.

Some shining factoids

557.75 tonnes - Is RBI's gold cache. Of this, 265.49 tonnes are held at Bank of England and Bank for International Settlement.

300% - Is the increase in gold holding of ETFs between 2009 and 2011. Now the stockpile is about 30 tonnes.

0.47 grams - Was India's per capita consumption of gold jewellery in 2011.

Source: ET

 

 

List of Costlier and Cheaper Items

A large variety of day-to-day usage items and services will burn a hole in the common man’s pocket with Finance Minister Pranab Mukherjee proposing to raise excise duty to 12 per cent from 10 per cent and a similar hike in service tax rate.

Following is a list of what will be costlier and which ones will be cheaper following the Budget 2012-13.

Costlier:

* Two-wheelers, cars, commercial vehicles,
* Refrigerators, air-conditioners, washing machines, watches
* Soaps, cosmetics, homecare items,
* Cigarettes and bidis,
* Packaged food items
* Pan masala and chewing tobacco,
* Unbranded precious metal jewellery,
* Imported luxury vehicles,
* Imported bicycles and bicycle parts,
* Imported digital still cameras,
* Imported gold bars and coins of certain categories, platinum
* Imported cut and polished coloured gem stones,
* Air travel, eating out at restaurants and hotel stays

Not all is gloomy as the Budget has also made some items and activities cheaper.

Cheaper:

* Mobile phone parts,
* Branded silver jewellery,
* Branded garments,
* Imported LCD and LED TV panels of over 20 inch,
* Matches,
* Footwear below Rs 500,
* Adult diapers,
* Soya protein food products,
* Probiotics,
* Writing instruments,
* Imported medical equipment

Simplified Version of Union Budget Proposals

Key Highlights of the Budget :

* GDP Growth in 2012 - 13 Pegged at 7.6 %

* Disinvestment Target at Rs 30000 Crore for Fy 2012 - 13

* Fiscal Deficit at 5.1% of GDP in FY 2012 - 13

* Income Tax Slab Proposed for FY 2012-13


         Upto 2 Lacs - No Tax
         2 - 5 Lacs      - 10%
         5 - 10 Lacs    - 20%
         > 10 lacs       - 30%


Important Changes


*  The exemption limit has been enhanced from Rs. 1,80,000 to Rs. 2, 00,000.

* The upper limit of the 20 per cent tax slab has been escalated from Rs. 8
   lakh to Rs. 10 lakh.

* Securities transaction tax (STT) reduced 20% to 0.1% for delivery
   transactions in cash market.

* The government is striving to come at a consensus on bringing FDI in multi-
   brand retail up to 51 per cent.

* Rs. 15,888 crore to be infused to capitalize public sector banks and financial
   institutions. A financial holding company will be created to raise resources
   to raise capital requirements of PSU banks.

* A central KYC depository will be created to avoid duplication of registration

* External commercial borrowing (ECB) will be allowed to part finance rupee
   debt of existing power projects.

* A proposal will be placed for a white paper on black money in the current
   session of parliament.

* Net market borrowing to finance deficit is set at Rs. 4.79 lakh crore in FY
   2012-13.

* Proposal to allow deduction of up to Rs. 5,000 for preventive health check
   up.

* Senior citizens not having income from business will be exempted from
   paying advance tax.

* Proposal to raise service tax from 10% to 12%, with exemption of service 
   tax to some sectors.

* Corporate tax remains unchanged.

* Excise duty of 1% on branded precious jewellery to be extended to include 
   unbranded jewellery.

* Branded Silver jewellery exempted from excise duty.

* Proposal to increase basic customs duty on imports of gold and other 
   precious metals.

* The finance minister slashed securities transaction tax (STT) by 20% to from
   0.125% to 0.1% which will help bring down transaction cost.

Rs 52 lakh: This is what a 30 yr old stands to lose due to tobacco use over 30 years

You might have come across articles about simple money saving tips. Cut down on power usage with energy efficient lamps and save Rs 300 a month. End the subscription to costly TV channels and save Rs 120. Give up on small luxuries like a cappuccino or a dinner date and see your savings zoom. Though all these penny-pinching measures are worth considering, you can save a much bigger amount every year if you just take good care of your family's health.
It is estimated that the cost of smoking can add up to a gargantuan Rs 52.15 lakh over three decades (see graphic). Good health will not only bring down your medical bill but also prune your insurance premium. And this is when we have not even calculated the cost of treating serious illnesses such as cancer and heart ailments.

One cannot completely avoid falling ill. If there was such a formula, the medical profession and the pharmaceutical industry would go bust. But you can reduce the chances of falling sick by leading a healthy lifestyle that fortifies your body.

Kick the butt

Tobacco use burns the biggest hole in your finances. It hurts you at three levels. If you are addicted to cigarettes or gutka, it can cost you quite a packet. Even if you are a light smoker and consume five cigarettes a day, more than Rs 10,000 of your wealth is going up in smoke every year. Gutka users who use five pouches a day are chewing up almost Rs 7,000 in a year.

You don't need a research report to know that tobacco users are more likely to visit their doctor than non-users. Every time you visit a doctor, you end up paying Rs 400-500 as consultation fee and Rs 500-750 on medicines. Smoking makes your body vulnerable to respiratory diseases and cardiac ailments, besides cancer.

Insurance companies are aware of these risks and accordingly hike the premium for tobacco users. If you smoke or consume gutka, you will have to pay 40-60% higher premium for your life insurance. A 30-year-old non-smoker will pay Rs 4,100 a year for an insurance cover of Rs 50 lakh for 30 years. But if he smokes, the premium will jump 40% to Rs 5,800. The medical insurance premium is also lower if one does not make a claim.

This isn't all. Poor health caused by tobacco use also prevents you from leading a full life. Your career prospects can get affected if you fall sick frequently and miss work. This can be particularly debilitating if you are a self-employed professional. Even if you are salaried, taking medical leaves frequently can work against you. An energetic and healthy person is more likely to be shortlisted for a promotion than someone who is often sick.
 

Prevent, not cure

Kicking the smoking habit is not the only way you can save on medical costs. If you exercise well and eat healthy food, you are less likely to fall sick. Plenty of exercise, good rest and recreation will prevent heart ailments and lifestyle related diseases like depression, insomnia and anxiety.

It's also important to get a minor problem treated before it turns into a major-and expensive-worry. A root canal treatment for a decaying tooth costs roughly Rs 8,000-10,000, besides numerous visits to the dentist. Instead, if you get your teeth checked every 6-8 months, any cavity can be promptly fixed. A check-up costs only Rs 400-500 while the treatment of a small cavity will leave you poorer by Rs 800-1,000.

The good news is that insurance companies are actively encouraging their customers to take these preventive steps. Customers are offered attractive discounts on annual medical check-ups, yoga classes and even gym memberships. Some companies even go to the extent of checking how many hours you are in the gym in a month. Understandably, your insurance company has a vested interest in your well being. Shouldn't you too have a vested interest in your good health?


Source : ET