India's Infatuation for Gold

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.