I think this is a pretty good way of deflecting focus from its own failure viz the high and rising fiscal deficit.
First lets look at the identity
C+I+G+(X-M) = C+S+T
Where C = Consumption, I = Investment, S = Savings, G = Government expenditure, T = Tax, X = eXports and M = iMports
ð (I-S)+(G-T) = M-X
This means that when investment exceeds savings and government expenditure exceeds tax revenue, then import will have to exceed export thereby driving up the CAD.
In a developing economy, investment requirement is quite likely to out pace savings. In case of India, while investment has been declining of late, savings has also declined since persistently high inflation has reduced space for savings. As a result, investment continues to exceed savings. The problem has been further exacerbated by unbridled rise in government expenditure (talk of populism and corruption), while revenue falters especially as the economy slows down. Essentially, the problem is high CAD boils down to rising fiscal deficit.
In this regard, it is also important to note down a couple of things:
· India’s CAD excluding gold imports continues to rise, thereby debunking the myth that high gold imports are causing a spurt in CAD
· If the Indian citizens look at gold as a hedge against inflation and rightly so, who is the government to intervene in their rational choice
In a nutshell, the government is barking down the wrong tree with an aim to deflect attention. The unimpressed CRAs (credit rating agencies) continue to be cautious about the deficit and, given that 2014 is an election year, even FY14 looks like a difficult year as far as fiscal deficit is concerned. So, improvement in CAD or not, the only positive outcome of this move is the likely increase in revenue for the government as gold imports are unlikely to slowdown much.