Gold Imports and the Current Account

The current account records a country's transactions in goods, services, primary income and secondary income with the rest of the world. Gold imported for commercial or household use is treated as a merchandise import, creating a debit in India's current account. Therefore, a larger gold import bill tends to worsen the current account balance, other components remaining unchanged.

Accounting effect on the current account

The current account balance equals the balance on goods and services plus net primary and secondary income. Since non-monetary gold enters the goods import account, an increase in its import value enlarges the merchandise trade deficit and, other things being equal, the current account deficit.

• The impact depends on the import value of gold, not merely its physical quantity.
• A rise in service exports, remittances or merchandise exports can partly or fully offset the gold-import debit.
• The trade deficit and the current account deficit are not identical because the latter also includes services, income and transfers.

Counterpart entry in the balance of payments

Balance-of-payments accounting uses double-entry bookkeeping. The debit created by a gold import is matched by a financial counterpart, such as an increase in external liabilities, a reduction in residents' foreign assets or a decline in official reserve assets.

• A current account deficit must be matched by net financial flows, reserve changes and any statistical errors and omissions.
• Gold imports do not necessarily imply fresh foreign borrowing because payment may come from existing foreign assets or reserves.

Important accounting distinctions

Only a transaction between a resident and a non-resident enters the balance of payments. Pledging or selling existing gold between Indian residents is therefore not itself a current account transaction, although domestic recycling may reduce the need for future imports.

• An export of non-monetary gold is recorded as a merchandise credit.
• Gold held by the monetary authority as monetary gold forms part of reserve assets rather than ordinary merchandise trade.

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