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Your Gold Purchases Have a Negative Impact on the Economy

Aug 30, 2019 | 9 months ago | Read Time: 3 minutes | By iKnowledge Team
Your Gold Purchases Have a Negative Impact on the Economy

When Lalita lost her mother unexpectedly to a sudden illness, she was surprised when going through her belongings, to find close to Rs 50 lakhs worth in fixed deposits, a number of insurance policies, naming her as the beneficiary, involving a payout of Rs 30 lakhs and a number of valuable miniature paintings that could be sold for a good sum. After her scientist husband had died ten years previously, Lalita’s mother had been receiving his pension money all of which she had been squirrelling away and saving for her unmarried only child.

What did not surprise Lalita was the cache of gold jewellery that she found locked up in an iron box and hidden among her mother’s clothes. When she got an expert to value it, there was about 10 kgs worth of gold ornaments, some of them inlaid with precious stones including diamonds. Lalita surmised that most of it belonged to her mother given during her marriage and she must have bought something more during the years for her daughter.

Lalita’s story is not an isolated incident. Indians, across all strata of society, are used to buying and hoarding gold as it is seen as a safe investment. The total hoarded amount of gold with Indian households is estimated at a record 24,000 tonnes with a monetary worth close to $1 trillion.[1]

Gold Rush

One of the largest consumers of gold in the world, Indians are in a perpetual state of gold rush. Gold is the go-to metal to mark all auspicious occasions, religious and social, while the most important investment opportunity arises during weddings and gold demand spikes during the marriage season. While the main purpose seems to be ornamentation, Indians also use gold as a hedge against inflation and to monetise during times of financial hardship. About three-fourths of the demand for gold is due to jewellery, according to the World Gold Council. There is a sentimental attachment to gold, which transcends its monetary value.

The estimate about the amount of gold with Indian household is only an educated guess because there is no comprehensive sales data on gold, with transactions almost always being in cash, at least so far.

If instead of buying gold, Indian households were to take out life insurance policies that would be a far more effective hedge against future risk. 

Gold Imports and its Impact

India produces minimal gold and almost the entire amount of the metal is imported. In order to meet the insatiable appetite for gold among Indians, the country spends a sizeable amount in importing it. Gold and crude oil together account for one-third of the country’s import bill. In fact, after crude oil, gold accounts for the largest item on the import list.

According to media report, gold imports in FY18 was in excess of $33 billion, a rise of 22% from a year ago while for the current fiscal year it is expected to be 10% higher.[2]

The problem with gold is that it is useless. It has its industrial uses, but the bulk of the demand is from households and it does not contribute anything to the economy. It sits in households, in bank lockers or made into jewellery and worn. There is no productive value. At least crude oil has the merit of being of use in various industrial applications.

Higher imports mean a higher current account deficit (a positive difference between imports and exports). The gold that we buy is financed out of the country’s foreign exchange reserves, which means an outflow of capital. This has a direct impact on the Indian currency, which is always under pressure.

If the amount that we spent in importing gold were to be spent in investments in the country’s infrastructure, it would be far more productive.

In 2015 worried by the burgeoning gold import bill, the Indian government introduced two new schemes. The Gold Monetisation scheme[3], with a view to flushing out the hidden hordes of gold with Indian households and with temple trusts and the Sovereign Gold Bond Scheme[4], to channelize gold investments away from physical gold into paper form.

Somehow, Indians have not taken to either scheme or import of physical gold continue to flourish, affecting the economy. It will require a radical change in the mind-set before traditions and habits change.

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