The Rs 55,80,000 crore question

Nov 20 2012, 10:18 IST
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Government should consider financial schemes to replace gold holdings.  (Reuters) Government should consider financial schemes to replace gold holdings. (Reuters)
SummaryGovernment should consider financial schemes to replace gold holdings.

Government should consider financial schemes to replace gold holdings

Blame it on tradition or on its popularity as a hedge against inflation, but Indians are diverting a large portion of their savings to gold. This has reduced their financial resources for investment and added to the country’s problems, including twin deficit woes. It is also a major reason for high interest rates, low growth rate and high inflation.

India’s entire current account deficit of $57 billion (net of software exports and remittances) in the fiscal year 2012 would have turned positive if we had not imported gold worth $62 billion. The saga of gold imports has been continuing for many decades, with imports of gold, silver and precious stones making up the entire current account deficit. This means India is exporting its capital to countries producing gold, silver and precious stones. In return, we get a weak rupee, lower credit rating, higher dependence on foreign inflows, lower investments, lower GDP growth.

India’s obsession with the yellow metal has made us the largest holder of gold in the world. According to an official estimate, we hold about 18,000 tonnes of gold, importing more than 700-800 tonnes every year. The actual amount we hold is likely to be much more as gold stocked in temple vaults and private lockers is probably not accounted for. At today’s market price, the value of this gold is Rs 55,80,000 crore, which is almost 85 per cent of India’s stock market capitalisation, or just a little less than our banking sector deposits.

That said, an investor can raise several objections against slapping curbs on gold — he should have the freedom to invest where he likes, gold has given pretty good returns in the last decade, it is an ideal hedge against country risk and inflation, it is freely available across India and probably has a better distribution network than even the banking system. It is a fact that jewellery stores outnumber bank branches, insurance agents and mutual fund agents. What’s more, gold can be bought with cash and used as security for short-term finance. Such factors have increased the lure of gold for consumers and investors — but at great cost to the country.

In 1933, the then US president, Franklin Roosevelt, issued an order asking citizens to return gold held by them in a bid to tide over a crisis. Offenders were handed out a fine of $10,000

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