Golden dreams and nightmares

Union Finance Minister Palaniappan Chidambaram is a worried man now-a-days. His worry is not due to inflation or poor investment by moneybags living in other countries but the yellow metal. Its spell on the country is legendary and its lure for women is irresistible. In the last two decades, that is when the country started opening up the economic gates one by one and the common man's income levels started going up, our appetite for gold also has started increasing.

It's something that defies Western economic principles. When they have money, they don't rush to buy gold bars, jewellery, ornaments, coins, etc. They spend the money on investment in companies, housing, cars, travel and on anything but gold. Their golden possessions, at the most, are 18K gold chains, earrings and finger rings which, in this country, nobody touches. Westerners think buying even of a few grams of gold is a dead investment, without any returns.

Of course, they are right; if you buy 18K gold, it is. But if you buy 99.999% pure gold it is worth talking about since it fetches handsome profit when you sell it at the right time. But those tricks of the trade only a few know and it's not everybody's business to hoard and sell the yellow metal. In other words, gold is as precious as it is said to be for most of the people.

But here, in India, it's different. While bullion trade is left to fat cats of the industry and the business community, ordinary citizens buy gold in the form of jewellery for personal use, not in grams but in tolas (one tola is 11.6 grams) and anything less than 22K is considered junk. Any auspicious and happy occasion like birthday and marriage is only a ruse to buy some gold and gift it. Even if the occasion doesn't demand a golden gesture, it's customary to buy the yellow metal in any one of its myriad forms and put it in the safe custody of a bank or lock it at home.

One of many good things about the noble metal is it loses neither sheen nor value even after decades of hibernation. On the other hand, as our experience shows, its value will go up with the time. So, it makes sense for millions of average Indians to buy gold in one form or another and keep it safely for future use. That is, passing it on to daughters at the time of marriage or turning it into instant cash in times of need.

This practice has been going on for ages since gold is a hedge against inflation and currency depreciation. No amount of persuasion or dissuasion could wean the public from buying gold and stock it. Some like to call it hoarding; but if one uses common sense, one can see the merit in it: Gold appreciation is only next to that of real estate.

It may be ancient wisdom or practical economics to accumulate as much gold as possible so that families, particularly womenfolk, don't find themselves on the road when some calamity strikes them. That's how our gold stocks in private hands have started going up. In recent years, thanks to burgeoning middle class prosperity and millions of expat workforce in the Arabian Gulf countries, gold inflows, legally and illegally, have increased by leaps and bounds.

Nobody can even guess-estimate how much gold Indians have or its value. Conservatively put, it could be more than a trillion dollars, making India perhaps the only country in the world to have such massive gold stock in private hands. And, it is growing.

Ironically, what we produce is a trickle; most of the gold is imported and it is a drain on our forex reserves. Price doesn't matter. High or low, the price fluctuations will have little impact on our consumption. If the international gold price dips, the mad rush for the yellow metal starts at jewellery shops as it had been witnessed recently.

The rising trend in gold consumption may be indicative of our increasing prosperity and wealth. But it costs us dearly. For instance, India imported 142 tonnes of gold in April and in May 162 tonnes. Last year, the monthly average was 70 tonnes and in the first two months of this year it was a whopping 152 tonnes of gold.

That's what is giving PC nightmares instead of golden dreams. He has already hiked the import duty on the yellow metal and wants the banks to stop selling gold coins and advise customers not to buy gold. Well, it's easier said than done. If the minister tightens the rules further, the move can lead to large-scale gold smuggling and fuel corruption at entry points.

If PC cares to go into the root cause of why people are gold-crazy and are often struck by yellow metal fever, the finance doctor may find a cure.