Giddy with gold

It has little utilitarian value as a commodity. It cannot be eaten or made into clothing to be worn (except as a freakish shirt someone recently made, weighing 3.5 kg at a cost of over `10 crore!) nor is it any material of construction. Yet it gets to everyone, without regard to gender, race, religion, nationality or economic status. Most of all, it gets to Indian economic policymakers. Gold has caused major headaches to our current finance minister, P. Chidambaram. But he is hardly the first one to rue India’s golden aspirations. Morarji Desai, the finance minister in 1962, was instrumental in enacting the gold control order in the aftermath of India’s China war that year. That order prohibited private ownership of pure gold bars or coins and restricted new jewellery to be made only from gold not exceeding 18 carat in purity. Gold smuggling flourished, creating legends out of the likes of Haji Mastan. Never a popular leader, Desai continued to reap the bitter harvest of that act even when he became Prime Minister 15 years later. The order was repealed 30 years later in 1992. We can now own gold and import it as well, after paying a customs duty, which now stands at six per cent of the value. Mr Chidambaram now faces a different sort of problem. India imported 933 tonnes of the precious metal in 2011-12 (27 per cent of the global volume). Imports of gold and silver have grown by 30 per cent in volume in the five years up to 2012. They now rank in value second (albeit a distant one) only to petroleum and amount to about $50 billion annually. That is a major contributor to the external trade deficit. The latest Economic Survey observed that “the rise in imports of gold is one of the factors contributing to India’s high trade deficit and current account deficit in 2011-12, forming 30 per cent of its trade deficit.” It is a mercy, possibly only a small one, that gold imports have actually fallen between April and December last year. International gold prices have steadily risen for the whole of this century. They now average $1,670 a troy ounce (31 grams), which is the same as the prevailing Indian prices of around `3,000 per gram. This equalisation is a direct result of the removal of restrictions on imports. Indian imports of gold have continued to grow even as its price has increased. This would appear to fly in the face of accepted economic wisdom, which tells us to expect just the opposite. The Economic Survey says, “the worsening global situation has also led to a rise in purchase of gold as a safety metal and a further rise in its price.” The global situation is an alibi invoked too often and with little conviction in the recent past to make sense of the prevailing Indian realities. We need a more relevant and specific explanation. “In prosperity as in the hour of need, the thoughts of most Indians turn to gold,” observed India’s economist for all seasons, I.G. Patel, in 1958. He was addressing then the situation caused by “the steady drain on our foreign exchange reserves for over two years”. Substitute current account deficit for foreign exchange reserves and the great man could well be addressing India’s position 55 years later. Gold represents a store of value which could be used in future. Like currency notes stuffed in pillowcases (and quite unlike bank deposits or investments in shares), this value remains completely idle until it is actually used. That is what makes gold hoarding vexatious for economic policymakers. A part of the nation’s resources cannot be employed to generate future incomes. Yet if the return on investments — the interest on bank deposits or dividend income — is less than the rate of inflation, such savings actually lose value over time. That makes people prefer gold in the expectation that it will at least not lose value and possibly gain, if its price appreciates. If the perception is that the price rise in gold is not temporary, there is even greater incentive to buy and hold it. Let us also not forget that gold is the preferred use for tax-evaded wealth. We in India do not buy gold simply as an investment. We also attach some consumption value to it. Our ownership of gold comprises in large measure of ornaments, which are prized in their own right. Gold is thus a consumer good as well. And this happens all across the income spectrum. I saw tribal coffee growers in Araku valley of Andhra Pradesh who had suffered starvation until recently display with pride their small gold acquisitions. Parents also make phased gold purchase over time for use in children’s marriages even when prices are rising in the entirely reasonable expectation that later purchases may be even more expensive. Therefore, rising prices do not necessarily dampen our enthusiasm for gold. On the other hand, rising incomes actually spur us on to buy more gold. Only imminent and utter destitution could lead to dishoarding of gold. But even that is now buffered by the offer of no-fuss loans against gold. The Economic Survey says, “to restrict the rising trend in gold imports which is adversely affecting India’s balance of payments (requires) bringing down inflation as well as expanding the range of investments investors have easy access to.” But even these thoughts are not new. Dr Patel had observed in 1950 (when he was only 25) that “during the inflation and civil strife of recent years, the gold-holding classes proved wiser than the hoarders of local currency or investors in stocks and real assets.” We have moved a long way from the 1980s, when biscuits referred mainly to gold. Amitabh Bachchan who gained ever-lasting fame by his portrayal of a Haji Mastan-inspired character in Deewar, now flogs gold for a leading South Indian chain of jewellery shops. But inflation persists, political and other uncertainties loom large on the horizon, and social trends are set by TV soaps flashing gaudy ornaments. So despite an expected fall in international prices of gold and a slight slowing of its imports, nothing is as good to us as gold.

The writer taught at IIM Ahmedabad and helped set up the Institute of Rural Management, Anand. He writes on economic and policy issues.