January 3, 2016    3 minute read

Liquidating Indian Gold

   January 3, 2016    3 minute read

Liquidating Indian Gold

India is one of the largest importers of gold in the world. Gold assumes cultural significance in Indian culture and is purchased in relatively large quantities during weddings, to be worn by the bride. This is why India’s demand for gold peaks during the winter months, which is the wedding season. Gold has also acted as a safe haven in a region which has seen political and economic instability over the past centuries. For women it provides social security. As such its is inbuilt in most Indians’ psyche that investing in gold is a safe bet, buffering against inflation. For thousands of years, local mines were able to supply demand. However, over the past few decades demand has outstripped supply. The problem with importing large quantities of gold (which is India’s largest import) is that it causes the trade balance to shoot up, especially at a time when exports are sluggish. This leads into a higher current account deficit which threatens India’s macroeconomic stability. The other problem with the gold imported by India is that it sits idle in the lockers of India’s middle class. This is effectively money taken out of the economy which is not put to the best of use.

In any ideal world India, would simply focus on boosting exports and cover for gold imports, yielding in a manageable trade balance. It would not be ideal, but gold would not pose much of a threat to external indicators. The “Make In India” campaign aims to do just that, but structural reforms needed to change India into an exporting nation are stuck in parliament, highlighting that it will be a slow process. The finance minister had also slapped taxes and duty on gold imports in an effort to curb them. However such a move is regressive as, if demand exists it will only encourage smuggling and aid anti social elements of society.

Keeping all mentioned above in mind, recently Prime Minister Modi launched a gold monetisation scheme, by introducing gold backed bonds to be sold by banks. It is aimed at getting gold from out of the cupboards into the banking system to boost liquidity and lending. However, the response to the scheme which was launched with much fanfare has been disappointing.

Of a reported 20,000 tonne gold Indians are said to possess, only 400 grams have been obtained by the scheme.

Issues range from lack of facilities to weigh and value the gold, to plain lack of knowledge of the existence of the scheme. The government however must persist with what is a well thought out monetisation plan. Execution and implementation must improve with time. It is a progressive measure which tackles a major economic problem head on.

Ultimately this is going to boil down to a matter of perception. No matter how sound a policy, Indian citizens need to be informed about the benefits of “paper gold”. The government fluffed their communication and lost of battle of minds on the sensitive land acquisition bill which has been effectively mothballed. To turn Indians off thousands of years of tradition and social security is going to be an uphill task, especially when economic literacy even among the educated is low. Just like India’s dream of being an export powerhouse, it will take considerable time to achieve.

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