“The quantum of gold import is a clear indication that a large section of the community wants investment in a dead asset only with the expectation that the value would appreciate. Time is ripe to motivate our educated upper middle class to climb from saving mode to wealth generation mode. My request to financial analysts and other experts and leaders in this field is to ensure that we can create confidence in the market, spread financial literacy and merit of investment.”
Finance Minister Pranab Mukherji speaking in June, 2012
The Hon’ble Finance Minister was echoing the sentiments of the official establishment and the mainstream economists who have always been critical of the India’s age-old love for gold. The immediate provocation was the release of figures for FY 2011-12 that showed an alarming increase of current account deficit (excess of total imports over exports) to 4.2% of the GDP and the primary culprit identified was gold imports that had grown more than 40% over the earlier year to cross Rs. 3 lakh crores, keeping the gold import bill well ensconced at second place, with only the import bill for petroleum products being higher.
The mainstream economists dislike gold for several other reasons. It is considered to be a non productive asset in the sense that unlike share purchase or bank deposit that are used by the recipient to finance further economic activity, gold is either worn as an ornament, or else is kept usually in a locker for safety. Jewellery, or even coins or bars purchased as investment, are certainly the end product of an economic activity comprising of their manufacture and sale. But with the act of purchase by the customer, though very much visible as adornments in marriage and other functions, they go out of circulation as far as the economic field is concerned.
Another cause of antipathy of the official machinery for investment in gold is that purchase and sale is mostly in cash leading to avoidance of state duties by the seller and hoarding of black money in the form of gold by the buyer. Efforts to dissuade investment in gold by the Government by imposing higher duties and restriction of free trade in gold has invariably resulted in price differential between the gold legally available in the country and that provided by the parallel economy run by smugglers and hawala racketeers. Giving such characters the space to operate is obviously not in national interest. It is also a historical fact that gold control has never worked.
India imported around a thousand tonnes of gold in FY 2011-12, which is the highest in the world and accounts for a third of the total global demand for gold. During the same period the total domestic production of gold was a mere two tonnes. No one knows how much gold is available today with Indian households but reliable estimates place it in excess of 18,000 tonnes. Domestic production has always been meager. It certainly is intriguing that as much as ten percent of the total global stock of over ground gold has, over time, found its way to the Indian households. The reason was a favourable balance of payments situation through most of Indian history. With exports being more than imports, the surplus found its way into the country, in the coveted form of gold.
To comprehend the Indian fascination for gold, relevant indicators could be the fact that Sanskrit has numerous words for gold such as swarna, kanak, and kanchan while the ancient scriptures, statues and paintings demonstrate elaborate jewellery regularly worn by women and also the men. During the Mughal rule, large estates reverted back to the state on the demise of the principal and legal heirs could request inheritance only on payment of dues to the state and, possibly, bribes to the concerned officials. This encouraged conversion of assets into more discreet forms such as gold, silver and precious stones, which could be conveniently kept out of sight of the officials.
Gold, till date, is considered an excellent store of value, being relatively compact in volume, a status symbol and a hedge against inflation and, quite liquid in the sense that it can be exchanged for money easily. Even for the not so well to do, it can be worn on person, ensuring safety from theft, can be carried easily when fleeing from distress and can be converted into money or other assets whenever required. Girls, not being customarily entitled to a share in parental assets, get their portion by way of dowry, which contributes to their future financial security.
Unlike the developed world India does not have social security systems of free education, access to health care and old age pensions. It does have, at thirty percent, one of the highest rates of savings in the world and a third of that is estimated to go into investment in gold. Besides the status symbol of wearing heavy jewellery, gold ornaments have in India always been considered as an investment for tiding over potential financial calamities. The concept of insurance for financially securing the future is an integral component of the investment in gold and, with gold prices keeping pace with inflation, the quantum set aside in gold remains intact unlike other currency denominated financial assets.
Policy ought to work with the given parameters rather than attempt to reinvent a new Indian. Barriers to free trade in gold are best avoided, as it would only push the market to the undesirable parallel economy. Investment in electronic gold through exchange traded funds could be encouraged so that both the sale and purchase are accounted for while retaining the multiple advantages of investment in gold. The negative balance of payments is a problem for the country and can be countered by weaning the population gradually away from gold. For the illiterate poor, access to financial assets may be made simpler with minimal paper work and without the onerous KYC norms prevalent today. Returns from alternate financial assets must be assured, possibly through sovereign guarantee, and the quantum of return must be adequate to counter inflation. Viable alternate avenues for investment must be offered that can compete with gold instead of recourse to the insensitive official diktat.