Posted by Dr. Gopal Unnikrishna Kurup
India's Infatuation for gold
They
say in Western culture that a diamond is a girl’s best friend. So, if a
diamond is a girl’s best friend in America, gold is even more than that
in India. India's
infatuation with gold is phenomenal. It is deeply ingrained in our
socio-cultural practices with wedding seasons seeing the maximum
purchase of the metal. In fact, India’s love for gold is ancient as the
Indus Valley civilization, (circa 2500 BC), when people wore gold
jewelry. The Gupta dynasty (250 AD) is known as the Golden Age, when
gold coins were circulated widely. The gene is still strong and we
cannot have enough of gold. Therefor gold is country's biggest import
after oil. Cultural factors, such as festivals like Deepavali and
Akshaya Tritiya, both considered auspicious occasions to buy gold. Gold
is far more than just a nice thing to wear at Indian weddings. It's a
key element of the religion and culture in a country that consumes 20%
of global production of the metal. In India it is status symbol, sign
of respect, inflation hedge, repository of emergency savings and, of
course, something to make the bride shine. This has
led to a spurt in purchase in the recent years which has caused a
rocketing of India’s imports of the metal. The government seems to have
woken up quite late to the fact that banks have been en-cashing on the
average Indian’s infatuation with gold.
Indian households have piled up as much as 20,000 tonnes of gold, worth $1.16 trillion, an historic high. The
World Gold Council’s (WGC) latest estimate of India’s household gold
reserves is 11% higher than the 18,000 tonnes it had been pegged at
earlier. Coupled with 557.7 tonnes of the central bank’s holdings, gold
stocks at known sources in the world’s largest consumer would represent
more than 75% of its gross domestic product. According
to the Reserve Bank of India (RBI), the country is the largest gold
importer in the world with about US$56 billion worth of the yellow metal
coming across borders during the 2011-2012 fiscal year. On
top of that there are about 400 tonnes of scrap gold entering the
Indian market every year, worth another $17bn or so at today's prices.
But
why is gold being made such a villain as it is made now all of a sudden
? Twenty two years ago, when our economy was tottering, it was this
yellow metal which rescued it from a probable collapse. India had to
airlift 47 tons of gold to the Bank of England and 20 tons of gold to
the Union Bank of Switzerland in 1991 to raise $600 million to tide over
payment obligations. Not only that, the yellow metal has rescued
several households during crisis. In the last few decades, gold has been
used as collateral for loans especially for the home loans. Such
schemes were also promoted by private and public sector banks
aggressively. If the government was so wise, why didn’t it stop banks
from doing so when they started?
In
fact, it is the same UPA government (which is now advising Indians not
to buy gold) that went ahead and bought gold from the international
monetary fund (IMF). In 2009, when the IMF started limited gold sales
programme, it was the RBI which bought 200 tonnes of gold valued at Rs
31,490 crore ($6.7 billion). At the time, many analysts hailed it a
‘course correction’ of the 1991 decision of the government. The RBI’s
move was not bizarre because dollar was weakening and the apex bank
built its reserve on gold to shift away from holding assets in dollars.
The
crux of the matter is that the gold should be used for what it is good
at, that is, a hedge against inflation. Timothy Green, a well-known gold
expert, reminds us of a historical truth: “The great strength of gold
throughout history has not been that you make money by holding it, but
rather you do not lose. That ought to remain its best credential”.
It is the the import of such huge quantities of gold needed to satiate
India's huge appetite for it, and the inability of the Indian government
to properly regulate those imports, has contributed to the record
current account deficit that has in turn led to a generational
depreciation of the rupee. The
nation's swooning economy, marked by a sharp drop in its currency in
recent weeks, has pushed gold prices sharply higher, pain that's been
compounded by a government decision to increase import duties on
precious metals to 10% from 4%. The government now sees in the yellow metal a detriment to the nation’s economy.The
government's decision to increase the tax on gold just before the
November-February wedding season indicates how worried Indian economic
planners have become as fiscal deficits have soared, the trade deficit
has hit 4.6% and stocks have headed for the basement, knocking nearly
$100 billion off the market's value in August.
Adding
to the bad-news drumbeat, foreign reserves have fallen to $280 billion,
or the equivalent of seven months worth of imports, and economic growth
has plunged to 4.4%, less than half its 2010-11 level Meanwhile,
the rupee's 16% decline against the dollar this year has made it among
Asia's worst-performing currencies, forcing Indians to pay more for
gasoline, imported medicines, foreign trips and education. "India
has become the sick man of Asia," said Rajiv Biswas, Asia-Pacific chief
economist with IHS, a market information firm. "Global investors have
gradually realized in 2012 and 2013 that the Indian government is
'wearing no clothes' in the area of economic policy reforms."
The
steps India needs to take are evident, but they are politically
difficult. They include cutting subsidies and other populist welfare
policies that drive up government deficits; reducing red tape, opaque
regulations and inconsistent tax policies that deter investors;
intervening in currency markets earlier; and addressing a string of
corruption scandals in the defense, real estate, telecommunications,
mining and sports sectors. Bureaucrats and politicians are in paralysis and don't want to make decisions because all around them is some sort of scam.