Modi’s Goldonomics

Confusion prevails over the gold sector even as the government issues repeated clarifications over the possible sanctions on possession of gold by individuals. This confusion is already taking a heavy toll on gold trade across the country.

In a bid to sell its black money crusade, the government is deliberately floating news about imposing curbs on individuals holding gold. But the handshake with gold can prove to be a nemesis for Modi dispensation as middle class households are emotionally disturbed as they fear unnecessary harassment by the tax authorities while the filthy rich like Gali Janardhana Reddy can display a sort of a full shopping mall of gold during the household wedding.

The government is not yet clear on the modus operandi over the implementation of so called curbs on gold holdings. Unlike immovable properties, gold can be conveniently possessed escaping the scanner of tax authorities. The government is justified in cracking on the gold as it harbours ill gotten wealth. Cash sales in the gold and jewellery trade are quite common and serve two purposes.

The purchase allows the buyer the option of converting black money into gold and bullion, while it gives the trader the option of keeping his unaccounted wealth in the form of stock, not disclosed in the books or valued at less than market price. Gold market is thus highly vulnerable to black money transactions. At the same time, even the common man possesses and would like to hold gold for a host of reasons. Gold is an effective liquidity and used as a hedge against inflation.

Comparative study of land, stocks and gold markets reveal that the yellow metal often yields a reliable dividend, at a time when financial instruments that yield assured returns are increasingly made less attractive. This is often done to divert household savings into speculative markets. Ordinary Indians who have little or no risk absorbing ability often rely on gold as savings and investment destination too. Besides, gold in India has a significant social cultural importance.

Thanks to inflation and sharp rise in the property prices, gold is no longer relatively a rich man's preserve. A kilo gram of gold today is cheaper than a middle class apartment in the urban areas. Thus any curbs on household gold possession will be difficult to be implemented and can be an often sources of irritant for middle classes. This is the reason for middle class concern over Modi's goldonomics.

If the government is serious over stifling gold induced shadow economy, the restrictions should be on gold supply rather than household gold holdings. Even any sanctions on gold trade can result in gold smuggling. The government should be wary of this pre-reform experience.

Before resorting to curbs on household gold, the government should consider introducing alternative financial instruments to reduce the attraction of gold as savings instrument. This would dissuade ordinary Indians from gold thus making any restrictions meaningful. The cash chaos has caused more pain to the commoner rather than those having illicit wealth. The 'gold chaos' should not be allowed to further compound the plight of law abiding Indians.