Indian obsession with gold: All that glitters is not always good

Gold has a special value to Indians. It’s not just an investment avenue but much more than that. Gold is a safe and traditional way of saving and transferring wealth from one generation to the other. It is seen as symbol of social status, prosperity, well being and is of great cultural importance. Weddings, anniversaries etc. are occasions where nothing can replace gifting gold in the form of ornaments. Indians have great emotional attachment to gold. The love for gold sees no biases or discrimination based on gender, caste, economic or social status, education or such parameter. In fact this shiny metal seems to be one of the few things that unite India, the others being Cricket and Bollywood.

Problems associated with Gold Consumption in India

Nearly one third of global gold demanddemand comes from India, way ahead of even China. Surprisingly, India produces almost no gold of its own and pays for every ounce of the massive import in dollars – losing valuable forex reserve in the process. Not surprisingly, gold is the second highest contributor to India’s import bill. It severely affects the country’s balance of payment (BoP) and is a major factor after crude behind theCurrent Account Deficit (CAD).

The CAD and fiscal deficits have widened to such uncomfortable levels in recent years that India’s sovereign debt rating has been at risk of downgrading to below BBB — i.e. to junk bond status. CAD has reached 6.7% in the last fiscal year. Rupee is trading at historic lows of near Rs. 60 per USD, which is both a cause and an effect of CAD and can in turn be partially credited to huge gold import levels.

Chidambaram appeared disgusted while addressing a media conference last month where heformally requested the Indian citizens to stop buying gold. His past efforts to curb gold imports have not had much effect. There have been two duty hikes in the past six months viz. from 4% to 6% in Jan, 2013 and from 6% to 8% in June, 2013. This has not done much to curb  gold demand. And there is not much that can be done about it. A further hike in duty will only lead to gold smuggling and huge loss of tax revenue. Obviously his call to the nation to stop buying gold is a result his annoyance with the craziness over gold. Indians are literally axing their own feet by buying the yellow metal in such huge quantities.

Given the price inelastic demand of gold, the huge CAD and depreciating rupee, the concern seems to be quite legitimate. What hurts most is the fact that the precious forex reserves of an import heavy country like India are being spent in acquiring a dead asset which not only blocks liquidity and capital but also does nothing to add value to the economy. The same forex reserve could be spent on critical commodities like coal and gas which could help reducethe energy deficit and bostthe economy.

The old  adage “all that glitters is not gold” can be aptly tailored to “all that glitters is not always good” and  will suitably describe the negative impacts of this glittery obsession hurting the Indian economy.

Article by Patrik Fonce of QuantShare