If such large quantities of food items were imported, it is quite understandable; it would feed people. But what is the use of gold? We may not have a solid reason, but traditionally we have been buying gold.
Let us get into some basics: Worldwide roughly 52% of the gold produced is used for making Jewelry, about 12% is used for Industrial purposes, 18% as Investments holdings (Gold ETFs etc, unaccounted) and remaining 18% is central bank holdings.
Out of the 52% worldwide jewelry consumption, majority happens in India. Roughly a middle class household buys Rs 15-80 lacs worth of gold jewelry in a lifetime.
Why do Indians buy so much of jewelry?
The fundamental reasons for buying gold jewelry are rooted in Indian culture especially during weddings. Lot of alteration has happened to our traditions but gold purchase on the occasion of wedding has not changed much. Though the newer generation is not too fond of wearing or flaunting gold jewelry, the demand for gold jewelry has not gone down. We end up demanding 950 tonnes of gold every year.
Why do we wish to maintain this aspect of our culture and tradition?
Though many of us may not understand the inflation angle of it, intuitively we all know that it is a great wealth preserver. Wealth is preserved when the value of investments grow at a rate more than the inflation rate. Gold precisely has done that consistently for ages. Hence Indians find gold to be a safe and simple investment avenue to beat inflation. The other alternatives like real estate and equities are out of reach or complicated for an average Indian and so they keep accumulating gold. After all gold is wearable wealth too.
So what is the fuss about it?
Why should the government worry when we are actually saving and creating wealth as we buy gold?
At the individual level, it seems to be highly beneficial in buying gold but there are serious repercussions at the national level. For us to understand this we need to get into a bit of detailing.
Where does this much gold come from?
The top five producers of gold in the world are China, USA, Australia, South Africa and Russian Federation. India does not produce much of the gold consumed. That means we need to buy gold from these countries. Gold nearly constitutes 12% of the total imports and comes only next to crude and capital good. This causes problems in forex and you wonder what the problem is. When we import gold we need to pay in foreign currency and we roughly require $60 billion worth of dollars. This directly affects the value of rupee negatively and thus creating further prices raises especially petrol and diesel.
Another reason why gold may not be great to the economy is its unproductive nature. Gold does nothing but remain idle in safes or bank vaults. Other financial instruments like fixed deposits, investment policies, shares, bonds etc is a great source of productive funds for corporate and government bodies, creating positive impact on the economy.
This is making the government jittery. Government wants to discourage import of gold and hence have recently hiked the import duty. We believe this might not create too much impact on the demand as people might absorb the price rise and may even end up assuming to have created wealth.
Increase in import duty may encourage smuggling and black economy. If the finance minister openly declares that the import duty will be brought down at a particular date, then the investors may refrain from investing in gold till that period.
The way out for individual investors
We do not suggest you totally boycott gold as investment. But ensure it does not exceed 15% of your total investment corpus. And instead of buying physical gold look at gold ETFs and gold mutual funds.
May be in the next century if the world economy goes back to the gold standards, Indians will be the richest then.
Author: Kripananda Chidambaram