Gold Taking Shine Off Indian Economy

Gold Taking Shine Off Indian Economy

gold

Akshaya Tritiya in 2004 marked the beginning of a trend in Indian economy which changed its shape remarkably. India was a ‘Golden Bird’ once and then various foreign invasions followed by British rule exploited Indian gold reserves completely and spared a very less amount in the hands of native people. But if we have a look at the past few years, ironically, it seems like Indian masses have decided they will bring the glory back to the country and they have taken all the burden on their shoulders itself. Else, its difficult to explain the gold buying spree that is making new records each year.

India’s current account deficit problem has been driven by the insatiable demand of gold by the customers in the first place. With just three working gold mines in Jharkhand and Karnataka, all the demand is met by importing gold from UAE, Australia etc. As a result, the imports increase every year due to the ever increasing demand of gold, thereby widening the fiscal deficit. The wedding season in India is an occasion that demands a much bigger spending spree on gold than any other festive season in the country. Ostentatious weddings are the perfect occasions to show off one’s jewellery. Apart from this, precarious market nature and low return on investments in various institutions have shifted the interest of investors to gold which has been quite successful in giving back excellent returns.

The glittering yellow metal has always been a reason of worry for the economic policy makers. Too much investment in gold reduces the liquidity in the market. Fiscal deficit is widening with the increasing oil prices, weak government and adding to that, heavy imports of gold.

Government has been trying to curb the gold imports but love for the metal has failed all the policies adopted till now. People keep on purchasing gold for marriages, dowry, offerings in temples and nevertheless as investment. Import duty was doubled to 4% last year but didn’t produce the results as expected. Now, Finance ministry is thinking of regulating the gold imports by fixing the upper cap and it has further increased the import duty to 6% but there is a risk associated. There is a very high probability that it may wake up a sleeping devil – Smuggling.

The motive with which institutions like Muthoot, Manappuram were allowed also seems to have backfired. Loans provided by them do increase the liquidity to some extent but they have made gold loans readily available to everyone thereby increasing the tendency of the investors to buy more gold that will not only ensures good value addition but can also be encashed easily when required. The funds used to buy gold are misallocated capital because when the capital will be needed for investments, it will be difficult to find it as it has already been invested as gold.

While any policy aimed directly at curbing imports is unlikely to succeed in the long term, there is a ray of hope for the government, and it lies with the vast gold stocks that Indian households have. The RBI report talks of ways to fulfill some of the domestic demand for gold by further unlocking that vast stock of gold, such as by making banks and importing agencies that bring gold into the country, act as both buyers and sellers of domestic gold (rather than just sellers as of now). Perhaps India’s current account deficit problem could be solved by the same public who drove that deficit upward in the first place.