A Smart Gateway to India…You’ll love it!
A Smart Gateway to India…You’ll love it!
Why Do Indians Love Gold?

     INDIANS adore gold. Newly wed brides are given enough jewellery to break their necks. Peasants store their pitiful savings in trinkets. Wise-guys sport rings like knuckle-dusters and tycoons with broken balance-sheets offer gold at temples in return for redemption. Even as economists and officials beg them not to, Indians splurge on the shiny stuff—in 2011 India imported more gold than any other country—about 1,000 tonnes, or a fifth of global annual supply. That is the same amount that sits in the central bank vaults of Switzerland. Why do Indians love gold?

Although tradition explains part of gold’s allure, such vast purchases are a modern phenomenon. India consumed only 65 tonnes in 1982. Until 1990 imports were all but banned. Bullion had to be smuggled in and its price within India was about 50% higher than outside it. The typical buyer was a poor farmer in south India, for whom gold was an ancient currency and collateral to borrow against in bad times. But deregulation has seen an explosion in gold purchases. Today bullion is bought by rich people, serious investors and speculators. Once crooks imported gold and pawn brokers made loans against it. Now most gold coming into India enters legally through banks. Many loans made against gold collateral are not from shifty money lenders but registered financial firms.

Gold buyers are being rational, in their own way. First, they think the formal financial system is stacked against them. Only a third of Indians have bank accounts. Real returns stink: consumer price inflation is higher than benchmark interest rates and government bond yields. The financial system is geared towards helping the profligate government borrow cheaply at the expense of savers. While foreigners buy lots of Indian shares, locals have been sellers for some time. Faced with few alternatives, gold doesn’t look so bad, especially given that its price rose every year between 2002 and 2011. The second reason why gold is popular is that it allows you to bypass a lot of India’s legendary red tape. Opening a bank account in India is bureaucratic hell. Gold, on the other hand, is widely accepted without any documentation. It is also a fine way to store wealth without paying tax—along with property, it is the asset class that the authorities struggle to track. Some reckon that the huge boom in gold has closely tracked the boom in political corruption over the past decade.

At the individual level, then, the gold craze makes sense. But in aggregate it is a disaster for India. Imports of bullion impose a massive strain on its balance of payments—amounting to $54 billion in the year to March 2013. India’s current-account deficit reached an alarming 4.8% of GDP that year, and just over half of the gap was due to gold. Gold also diverts savings out of the formal financial system, where they can be harnessed for investment. Thus while India’s overall savings rate is high and on par with those of Asia’s “tiger” economies, half of those savings are now diverted into physical assets. The ratio has been getting worse, as if India is moving back in time. The solution is to make sure that more people have access to the formal financial system. Raising interest rates to encourage savers would help, too. Both reforms will take time, however. In the short term, following a currency wobble over the summer, the government has resorted to a more primitive response, hiking taxes and imposing quotas on gold imports. For now this seems to have worked, with only $1-2 billion of gold being imported in October. But in time it may encourage smuggling. The gold price in India is now 10% above international levels, which suggests a premium for smuggling is being built in. And bootleggers are experimenting with new ways to beat the system: on November 19th 24 gold bars, worth more than $1m, were found stashed in the toilet cubicle of a Jet Airways flight to Kolkata.

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