India imports 800 tons of the 2500 tons of gold produced each year in the world. This creates pressures on the dollar-currency architecture of the modern world. What can India do to resist US pressures on this front?

In the last about 18 months, any drop in gold prices favored the dollar in the dollar:rupee trade.

Any drop in dollar-price of gold has been coupled with an increase in dollar price against the rupee. As a result, Indians had to spend more rupees to buy gold that was worth fewer dollars.

Now, this is strange! How this is calculated is difficult to understand. How our government accepts such a weird calculation is more difficult to accept.

On a long-term basis, gold has no positive, negative, inverse, divergent, convergent correlation with any other commodity, or exchange-traded stock. So, why this short-term coupling of rupee:dollar:gold? Our finance minister should explain this arithmetics to the country but that is not happening.

Is there a central bank consensus, including(?) Reserve Bank Of India (RBI), that the Indian consumer should not benefit from price-drops in gold? Is it Washington's plan with help of Manmohan Singh team to discourage Indians from buying precious metal?

Are people at Washington afraid that Indians are having more gold? If so why? How our government benefits by this? We know definitely, country does not benefits by this.

The prime motive in introducing these import duties on gold was to curb imports of gold but as expected; gold smuggling has gained a new life with higher import duties on gold to curb rising demand. A clear case of preventive taxation. This has nothing to do with earning extra revenue; if any body things so.

In the past, many experiments on reducing imports of gold have been tried but nothing works here, as Indian people have a special attraction for gold. This cannot be stopped by import duties particularly when we have a perfectly corrupt customs department and also when we have a lot of black money. We also know of alliances in smuggler lords and local police department.

Before we go into further discussion on this matter let me explain why all this attempt to curb imports of this precious metal. It is a matter of current account deficit or CAD that demands that we reduce our import of gold. Our government thinks that gold is not a necessity. Does it mean, we Indians cannot import anything other than bare necessity?

India's current account deficit i.e., exports earnings + inward remittances - imports expenditures = current account deficit (CAD), is running at less than 6% - up from less than 3% at the start of the Great Recession.

Exports to a world in the grip of the Great Recession have grown slowly while imports-increase into a growing Indian economy is faster. While the Indian CAD situation needs amends, it is by no means alarming. Particularly when this extra import is of gold. By conventional economic understanding when we buy gold in coins, biscuits or ingots we actually convert currency into real value but as we at present are controlled by Bretton Woods convention things matter otherwise; moreover, we do import jewelery and so it has a different consideration. Importers (or smugglers) should not import jewelery but only coins, biscuits or ingots to get standard valuation possible.

Keeping these factors in mind, a CAD that is higher by 2% of India's nominal GDP means a gap of about US$35 billion - no large sum for the Indian economy. Anyway, since a large part of Indian imports is gold, it further reduces the cause and need for alarm.

It is well-known and widely-accepted that vast sectors of the Indian economy are not measured or monitored by official statistics. Hence, Indian GDP is always understated. It is not surprising that Indian GDP measured on a nominal basis (US$1.85 trillion) is less than 42% of the figure obtained when measured on the basis of purchasing power (US$4.46 trillion). However, these actually wrong statistics is the base for international considerations and that matters.

Ostensibly, India's CAD situation is due to gold imports, India's second largest import, according to Government of India. The Indian Government has targeted gold for its policy-intervention attention. Clearly, US$60 billion gold imports cannot be the issue for a US$2 trillion Indian economy. There are good reasons to believe that this policy intervention by the Government of India is happening under US pressure - because Indian gold imports account for one-third of total mine production of gold in a year.

All that concerns our government is CAD situation. This is essentially calculated on the basis of official imports and cannot consider what is happening at the smuggling level.

If we allow smuggling by conniving at that we can still continue to bring in all the gold we want and at the same time keep the balance of current account. There is no direct assessment of how much gold is smuggled. What figures we have are of official imports; and with them we have this CAD condition.

Artificial valuation of the rupee made exports uncompetitive; imports cheap – for which there was no foreign exchange. India regularly had meetings with AID India Consortium and elaborate cases for borrowings were made. The trade deficit remained.

Will things be different this time? I am sure that a few people in the Central Bank consensus group who think that this time, it will be different. Surely RBI's anti-gold policy is definitely misplaced. It is not like India controls global gold mines or production. Or is India in any position to stop other buyers from purchasing gold? Unfair apart, why must Government of India + RBI take unilateral steps to restrict gold imports into India? Who is behind this malpractice?

Like every other central bank in the world, the RBI also has been printing too many rupees. Unlike the rest of the world, Indian consumers have been sterilizing excessive printing of the Indian rupee by buying gold. This way, the market automatically sterilizes excess rupee liquidity. Moreover, more taxes means more smuggling. The higher the difference between the international prices and official prices, higher the profit margin for illegal imports; cause for more black money creation!

As of now, gold smuggling is limited to air passengers and carriers, which has limitations in terms of volume and cost. The bulk smuggling channels (by sea and land) have not revived, but the recent increase in customs duty will provide the profit differential to revive it. A custom's officer added that, it would be impossible for enforcement agencies to contain smuggling through these routes. This shall add to corruption amongst custom officers.

One source says, if gold coins, biscuits or ingots smuggled that will not cause to affect current account position as it is not documented. One cannot assess it correctly and any amount of guess work will not be acceptable. And that may be the reason why our custom's department has unwritten rule to allow 90 % smuggling and to catch only 10 % for book keeping.

Is this increase in Customs likely to reduce India's trade deficit? Most unlikely, it will increase capital-flight to offshore financial centers; from where, foreign-exchange earnings will get higher returns than in India. Higher customs or other barriers will mean more (and more) policy interventions that will increase compliance overload and reduce policy-impact.

In the face of global or local dislocations (due to drought, floods, earthquakes, war, epidemics) private gold reserves can help families to restart lives. Even without State support. Much of the reason for Indian economic equilibrium over the last 65 years, has been the India's private reserves of gold. However, if gold is imported or smuggled in the form of jewelery the impact will be much less whereas if imported or smuggled as coins, biscuits or ingots it will be better for those who import or smuggle and for the country. Because, in case of jewelry half of the cost is making charges. That money is actually wasted. And for that reason only coins, biscuits or ingots should be brought to get the best return. People of India will never stop bringing gold whatever be the price. Whatever be the restrictions. Addiction for gold amongst Indians is not controllable by anyway. That may be the reason our FM in a private meeting of South Indian community requested traders that they prefer to smuggle gold and not import. He also added that, there is enough BM to do all smuggling. That will be good enough to keep our CAD in control. That means, FM is in favor of smuggling gold rather than importing it!

All the same what action we take to resolve CAD issue?

Covering a gap of US$35 billion means looking at two big targets of US$17.5 trillion each if equally divided.

1. Increase oil refinery exports (set up two more Jamnagar type refineries), increase domestic crude output (split ONGC?) and shrink oil imports. Find better alternative such as Methane or Methanol to replace mineral oils for transport. These can be produced using farm and city waste. They are also renewable, that shall solve other problem of global warming and Carbon emissions.

2. Sign a Third-World rupee-trade FTA, which will boost exports to the Third World by US$12 billion and replace dollar imports with rupee imports.

It is these measures which will yield answers to the Indian CAD problem - instead of curbs, taxes and barriers to gold imports.

One more plan of action I would suggest that we encourage smuggling clandestinely.

But then ...

Washington's new strategy involves use of economic strangling of developing countries by using pressure tactics and this US intervention on our gold purchasing is part of that, as per James Rickards, of an American University in his book it is clearly mentioned.

"Not a nuclear or a conventional war, not even a biological or chemical war - but an economic and financial war and that is always undeclared! Simulating how an Economic Hit Man from other countries would operate, its effect on the US and the US response."

U.S. is planning to attack the world economics with CURRENCY BOMB. More dangerous than any weapon hitherto used to destroy a country. They have to do it before Dollar bursts and U.S. falls. U.S. ego always says, "If we go to hell all go to hell".

To handle it (currency bomb strategy) our business houses should rally together with undeclared government support to retaliate by using same tactics as US. It is possible particularly because economic condition of that country is not very promising; but if our PM is joining hands with Washington we may be able to do nothing!

All these actions point towards a declining US using more desperate means to stay on top. Luckily our boys at FM and RBI are fully aware of that. But they say they are helpless! Because our PM is on their side!In the nutshell, we have to be working on war footings to reduce our imports bill; if we cannot improve our exports.Experts say, the only way out to defeat currency bomb threat is to have more black money and more smuggling. What a mess! Currency bomb cannot work in economics with these two. So friends, are we ready for the currency war?Recently, I came to know of assurance by FM to Iyangar community that we shall chat on in the next post.