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The War Against Gold

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The Economic Survey, which was published in the middle of March, heralded the declaration of war against gold. According to it, imports of gold and silver, which were $36 billion in the entire year of 2008-09, had risen to $50 billion in just the nine months from April to December 2011. At a time when trade deficit exceeded $110 billion — almost a third of total imports — this must have seemed terribly unpatriotic to the rulers in Delhi. Their outrage found an expression in the budget. The finance minister raised the basic customs duty from 2 to 4 per cent on gold bars and coins of 99.5 per cent purity, and on non-standard gold from 5 to 10 per cent. This reflects the closed and unimaginative mindset of the finance minister and the coterie around him. For them, everything is black and white, and gold is pure black. They never ask themselves why gold imports have been rising so rapidly.

Indians are fond of gold, and have been for millennia. It has been the standard medium in which sons-in-law were bought. In old times, gold bought sons-in-law who could live on land revenue without having to toil, or who would win battles and gain the favour of kings. The king's favour continues to be important in modern India, as the finance minister can testify. But in addition, it has become possible to grow prosperous in business. In fact, sons-in-law with a great business future command much higher dowries than those who win politicians' favour.

If gold imports have gone up, it cannot be because the prospects of sons-in-law in business have improved. In fact, they have been clouded by India's economic weather: the future looks so dark that sons-in-law want gold as insurance to light up a rainy day. The economic boom after the reforms brightened business prospects, and diversified dowries; fathers-in-law started giving houses, shops and trips abroad in dowry. Now that the boom in these novelties is over, their share in dowry is going down, and that of bullion is going up. This factor is important generally, and not just in dowries: as business prospects have worsened, the share of gold in fresh asset acquisition has gone up. Even businessmen who are happily married or unhappily widowed are buying gold. The craze for gold is a sign of bad times, not a sign of crazy Indians.

Since the bad times are likely to last, so are Indian purchases of gold. They will be little affected by the raised taxes on gold. Indians buy gold not to sell it tomorrow; they buy it never to sell if they can help it, and otherwise to sell it once in a generation when bad times strike. Besides, the Indian gold market works perfectly. Taxes make smuggling profitable; if people find the taxes high, they will just pay new-generation Dawoods to bring gold from Dubai past missing or corruptible officials.

If the finance minister wants people to buy less gold, he should scrap his silly taxes, and bring the boom back to India. That is perhaps too much to expect of him. Booms are caused by expectations of profits, by technical advances, by falling costs and expanding markets. He is surrounded in Delhi by taxwallahs who look upon businessmen as legitimate victims and by advisers chosen for their socialist credentials. They know little about organising stable, long-term growth. Even if they did, they would not interest him, for he is no doubt thinking of the next general election, which is no more than two years away. It must be a matter of frustration for him that he has given away so much in previous populist experiments — such as the employment-for-a-bribe scheme named after Gandhi and the foodgrain subsidy which still awaits a name — that he has no money to buy votes any more. If his taxmen start raiding businesses and raising unfounded tax claims, maybe they will be able to soften up businessmen and make them cough up something in time for the election.

At least, that seems to be his calculation if we are to go by his behaviour. We are seeing a return to the good old days before reforms when Pranab Mukherjee cut his teeth, when a businessman who paid his taxes honestly was condemned to fail and the one who bribed was likely to survive. The difference is that then the finance minister — including Mukherjee — targeted all businessmen; now he aims to limit his unpopularity by confining himself to jewellers, goldsmiths and smugglers. He is also likely to make some customs officers on the gold route extremely rich; but that has undoubtedly not even been mentioned by his advisers, let alone given as a reason for taxing gold. But step by step, he is taking the grand old party to its old haunts. Whether it will win the next election is uncertain, but some of its servants are likely to get very rich.

(This story was published in Businessworld Issue Dated 11-06-2012)