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Why Do Indians Love Gold So Much?
The long term solution lies in increasing the economic growth so that the Current Account Deficit changes to Current Account Surplus. This is a tough call, under prevailing environment
Photo Credit : Reuters
Indians adore gold more than the people of any other country. This explains why Indians’ buying of gold can not stop. Unfortunately, India does not produce any gold. The last gold mines in Kolar and Hutti in the state of Karnataka have nearly exhausted their wealth. Mining the gold still left has become too expensive.
No bride, however poor, leaves her paternal home without at least a trinket of gold. For the rich and the super-rich, the bride is given enough gold to weigh her down. Marriages are finalized, annulled, postponed or solemnized on this transaction of gold. Arranging gold for their daughter often drives the parents to penury. Such is the centrality of the gold’s role in Indian society.
Peasants store their pitiful savings in miniature gold ornaments procured from village goldsmiths. Members of the political class flaunt thick gold necklaces around their neck to make a statement about their clout. Devotees donate gold to temples generously to invoke the deity’s blessings. The Tirupati Temple in South India possibly gets the highest gold donations — only to be locked in the temple’s vaults.
Indians do not heed their leaders’ calls not to keep their savings in gold, because by doing so, they boost the demand for bullion, which the country finds hard to import because of its limited foreign exchange reserves. India buys nearly 1,000 tonnes, or a fifth of global annual supply. That is the same as Switzerland’s total gold holding.
Why do Indians love gold so much?
Love for gold is rooted in the Indian tradition. But, the craze for buying it rose exponentially in the last three decades making India the largest importer of bullion in the world.
India’s consumption of gold in 1982 was a meager 65 tonnes. Importing the yellow metal has always been a big burden for this poor country. Various restrictions on gold buying have been put in place by different governments from time to time. Until 1990, gold imports were almost banned.
To meet its domestic demand, bullion was smuggled in by many ingenuous means, through the sea and air routes. In many Bollywood movies, the villain was invariably portrayed as a gold smuggler making deals in smoke-filled underground rooms. As a result of such restrictions clamped by the government, its domestic price was 50% higher than the price in the international market.
The typical buyers were the low middle class and middle class families, farmers and businessmen. For these people, gold was the ‘real’ currency with liquidity at par with cash, but having a time-tested shield against inflation. It was an asset a needy man could use to tide over hard times.
As India’s economy, rebounded, government lifted the controls on gold import. Overnight, the scourge of smuggling vanished. But, the decontrol resulted in some un-intended consequences. People were soured to buy more and more gold, diverting their savings from bank deposits to gold ornaments.
The profile of the gold buyer also changed with time. Today bullion is bought by cunning investors, the super rich class and speculators looking for some quick profits.
Smugglers no longer bring in the gold. It comes in through regular transparent and legal channels. Often, banks sell gold coins of different values. They also liberally accept gold as mortgage for giving hassles-free cash loans. The age-old pawn brokers compete with banks to stay in business.
Gold buyers, big and small, do some hard calculations. They think the economy and its financial system is unfair to honest earners of wealth. The reason—the creeping inflation eats away their hard-earned money. This perception, largely justified, drives them away from keeping their money in banks. They flock to the jewellery shops instead. The fast-rising prices of the yellow metal bolster their argument.
India, as a country is conspicuously under-banked. Only one third of Indians have bank accounts. This is another reason why Indians living in un-banked pockets put their money in gold. Added to that, there is the glaring mis-match between the fixed deposit interest offered by banks and the galloping inflation the average Indian has to contend with. The banks have to lend to the government at low rates making it impractical for them to pay more interest to their depositors. Such cheap funds encourage imprudent government spending.
The share market has looked pallid in recent years. Returns from shares are low. Faced with few alternatives, people with investible surpluses buy gold. The price of gold rose every year between 2002 and 2014. The second reason why gold is popular is that it allows you to buy it without having to fill up umpteen forms, returns and the vexing paraphernalia. To treat wealth and the wealthy with suspicion and envy is peculiar Indian trait. It is entrenched in the bureaucracy. Glorifying poverty is a part of Indian culture. Although it is a lofty idea, stifling the wealthy in modern times is a regressive policy.
Buying, keeping and selling of gold needs little paper work. So, there is much less snooping by the government inspectors. For tax evaders, gold is the safest and easiest conduit. The burgeoning political corruption in India generates humungous black money for which gold is the safest haven.
Such trend to freeze huge amounts of cash in gold plays havoc with the country’s economy. Import of bullion has drained India’s hard currency reserves. Gold import bill touched $54 billion in the year 2013. This contributed to India’s current-account deficit ballooning to 4.8% of GDP. Gold contributed to half of it. More importantly, funds locked in gold are not available for the country’s development plans. Thus, despite having high overall savings rate on par with those of Asia’s fast-developing economies, India struggles to mobilize funds for its development activities.
The position is worsening, giving a sense of doom. The solution lies in luring people to the country’s formal financial system. Raising interest rates on deposits can be a possible step. Both these measures may take time.
In the short term, following a period of unseen currency volatility in the past months, the government resorted to the time-tested measures like hiking taxes and imposing quotas on gold imports. This had some salutary effects. However, the scourge of smuggling may rear its head soon. The gold price in India is now 10% above international prices. Such a difference is an incentive for smuggling. Many queer instances of gold smuggling have been detected recently. A Jet Air flight from Bangkok landed in Kolkata with a huge quantity of gold bars tucked in its toilet. So far, it has remained unclaimed.
Thus, we can see that these short term measures are effective only partially. The long term solution lies in increasing the economic growth so that the Current Account Deficit changes to Current Account Surplus. This is a tough call, under prevailing environment.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.