Over breakfast, my husband Pradeep Kumar Gouda and I had a very casual discussion about the dropping gold prices. He told me, ‘Gold price has come down to Rs. 26000’, I replied, ‘We should buy it’, he retaliated saying, ‘No, we should not, it harms our economy’.
Our small discussion intensified his desire to write about why buying more gold is harmful to the Indian economy and he offered to write a guest column in my blog. So here it is!
King Parikshit, descendant of Pandavas once went hunting. Kali, the evil of Kalyug appears before him and asked him to allow him to enter his kingdom. The king denied but Kali pleaded a lot. The king accepted and told to restrict Kali to only places where there is alcohol, gambling, prostitution and gold. Kali happily accepted the offer and the first thing he did was to sit in the King’s golden crown and corrupted his brain. The activities which the king did later that day led to his eventual death and end of the dynasty. The king fell because of the evil in the gold. The same evil thing is hurting Indian economy very badly!
Indians for a very long time are fascinated by the yellow metal. The country’s merchants sold spices and other goods and brought gold home. Indians have amassed huge amounts of gold and our hunger for gold has never decreased. Today, India is the largest importer of gold and the recent drop in the gold price has not affected our demand for gold. In the last month, blame Akshaya Tritiya, our imports of gold has actually doubled putting a serious pressure on our current account deficit. India imported 1,015 tonne of gold in 2012-13.
Lets look at why we like buying gold. I agree, gold is amazing when it comes to jewellery. It adorns women greatly and men to a little extent. A recent statistics say that close to 70% of the gold we Indians buy is in the form of jewellery. Ironically, most of the jewellery we purchase ends up in lockers and in my opinion the new generation is not interested much in wearing jewellery to work place and there are very few occasions in a year where a person gets to show off the jewellery. While we agree that gold can be used as a last resort to save family in case of any crisis, the real question is what percentage of families actually sell physical gold or mortgage the family gold? This number would be very low.
People bought gold to hedge themselves from the high inflation the country saw in last 2-3 years. The rally in gold price started after the 2009 Subprime Crisis when people moved to safer assets like dollar and gold while stocks and other assets failed miserably. In August 2011, when S&P downgraded US dollar, Gold broke loose and rallied significantly. People thought value of gold will always appreciate which made them buy more and more gold. Eventually, gold did great when compared to other asset classes like stocks, bonds, real estate etc till the recent fall.
So, how is our hunger for gold affecting our economy? Gold, unlike other metals & commodities has frankly no economic value but only aesthetic value. As a metal, it has some awesome chemical properties but because of it price, it is not used like Copper or Silver. This was well recognised by John Maynard Keynes who opined that the Gold standard is a ‘barbarous relic’ and introduced new monetary system expecting that world will give gold lesser importance.
The economic growth of a country is directly linked to savings done by citizens and organizations. The money saved/invested by the people in bank savings accounts, fixed deposits, stocks, bonds, real estate etc provides funds for entrepreneurs to do business and helps in economic growth of the country. But investment in gold goes nowhere and has no positive impact on the economy.
The gold purchase has negative impact on our economy in two ways. Firstly, all the money that is “invested” in gold is getting locked and is not helping in the economic growth. Secondly, the country had to import lot of gold to meet the domestic demand. When we import anything, there is a downward pressure on Rupee vs. other currencies. Our obsessive gold imports (luxury) together with oil imports (necessity) have contributed significantly to depreciation of rupee. Rupee kept sliding as we imported more oil and more gold. This resulted in increased inflation and our monetary watchdog RBI had no option but to increase interest rates. Higher interest rates and inflation means higher cost of doing business and thus slower economic growth. The Gross Domestic Savings decreased from 36.8% in 2007-8 to 30.8% in 2011-12.
Gold is also causing significant harm if you look from environmental angle too. Today, gold production is less when compared to demand. Rough estimates indicate that to extracting one ounce of gold leaves 30 tonnes of rubble in open pit mining. Gold mining in West Africa, Philippines and places in Amazon have affected lives of local population and other species. Miners use harmful chemicals like Mercury and cyanide in the gold excavation process and these eventually contaminate the water stream.
The present government tried its best to curtail gold purchases. They imposed import duty on gold, they imposed tax on purchasing of gold, but results are very disappointing. People continued purchasing gold. Government has introduced two schemes with which they are trying to divert money being invested in gold into other assets.
Firstly, government is offering tax incentives upto Rs. 25000 for money invested in stock market under Rajiv Gandhi Equity Savings Scheme. Secondly, RBI is coming up with inflation indexed bonds starting from June 4. These bonds will not only provide interest on the capital but the capital itself is protected against inflation. The capital on which interest is calculated is also adjusted with the inflation. Even though, RBI presently indexed inflation with Wholesale Price Index instead of Consumer Price Index which reflects the inflation faced by a citizen more accurately, it is a really good step. These bonds are better as an investment alternative as your capital will always be protected against inflation. Also the money invested will be used productively and will aid in the development of the country.
I hope the recent fall in gold prices will make Indians consider other assets like inflation indexed bonds, stocks etc and help our country in its economic growth.
-Pradeep Kumar Gouda