Gold habits die hard in India

Gold is back in the news for the fall in its price both within the country and globally in recent days. Once derided by the celebrated economist John Maynard Keynes as “the relic of a barbaric age’, the charm this inert metal exercises in the minds of millions is mesmeric even in a country where cutting across status people hold on to gold and get it associated with their daily life in one form or another or in one function or another. As the demand for the yellow metal has over the years been quite out of proportion to the capacity to produce within the country, the yellow metal import has been the bane of India’s balance of payments position particularly more recently in the year 2013-14 when import of gold shot up astronomically.   So any decline in the price of gold is construed as a breather for the managers of the economy as they could husband resources for productive investment in place of expanding on costly and wasteful import of the yellow metal that is a sure-fire road to economic disaster.

 Over the three decades when the world economic topography itself had changed with the globalization and liberalization paradigm of development that many a country adapted, the gyrations in the bullion prices had seldom been baffling. For instance the $850 per troy ounce price at London culminated on January 21, 1980 was exceeded only on January 3, 2008 and crossed $1000 levels by mid-March, before making a nosedive to $700-750 range in late October in the aftermath of the world’s financial meltdown. Afterward, the actual rise supervened with prices reaching an acme of $1895 per troy ounce on September 5, 2011. Since then, despite the fragility of the world economic recovery and heightened geopolitical uncertainties, the gold prices have by far become on the wane with the latest price plunge of a five-year low on July 22 in London and leading metal markets. At the extant levels of around $1100 per ounce in London and Rs 25,000 per 10 grams in Mumbai, bullion prices are manifestly bearish, from their pinnacle of $1895 and Rs 33, 265 scaled on September 5, 2011, and August 28, 2013 respectively.       

When inflation blues and other economic uncertainties plagued the nation for far too long, most of them could readily find solace in putting their savings in the yellow metal that yielded them next to nothing by way of returns, though proffering them a reliable store of value when the chips are down to yield them a better return on sale.  Gold has always been the best safeguard to take shelter against a depreciating rupee. When customer protection against fraud by financial institutions has become hard to get by, people prefer to have faith in the luminescent gold as its possession gave them the sanctuary against uncertain times by its relatively better value for sale.

Despite the conviction of the people the world over in general and in emerging economies like India 

and China in particular about the yellow metal as a mascot against potential misery, last week witnessed the global gold prices plummeting its nadir in more than five years on the heels of reports of a potential US interest rate rise this year that prompted investors to sell heavily from their hoard. The price declined by four per cent to as low as $1088 an ounce in Asian trade—the lowest since March 2010. Investors turned in droves to the US dollar, which rose on the possibility of the Federal Reserve raising rates of a stronger US economy, going by the comments made by the Fed Chair Janet Yellen.

 Interestingly, the price plunge occurred despite the Middle Kingdom, the world’s biggest consumer, announcing on July 17 that its gold reserves were up 57 at the end of June, compared with the last time it disclosed reserve figures. Still, gold now accounts for 1.65 percent of China’s total foreign exchange reserves, compared with 1.8 percent in June 2009, in spite of the increase in tonnage.    

 For India, the price fall has come at a time when its authorities are trying to take the household gold to wean the people away from their wasteful habit that exacts cost to the exchequer. In the wake of a mini balance of payments crisis partly caused by unconscionable uptrend in gold imports in 2013, the authorities had to raise the import duty thrice in that year and linked imports to re-exports to contain the deficit and the fall in the rupee value. 

The steps helped pare down the deficit to $32.4 billion in 2013-14 from $87.8 billion the previous year, according to the Reserve Bank of India. Subsequently, the government let more agencies to import gold in May and scrapped the 20:80 rule requiring importers to sell 20 percent of their purchases to jewelers for re-export in November 2014. These measures aroused expectations that the government might lower the import duty.

 The All India Gems & Jewellery Trade Federation, which had urged the government to cut the tariff to 2 percent, said on Feb. 28, 2015 the industry felt let down by Mr. Jaitley’s resolve to retain the tax. But the deft finance minister stuck to the duty not only to fill the coffers but also to deter the reckless import of gold so that the die-hard hoarders would find the going difficult to continue. The regressive fallout of high import duty is that smuggling supervened aggressively than ever. About 200 tons of gold was smuggled in 2014, after controls drove premiums paid by jewelers to as much as $160 an ounce over the London cash price, bullion industry contended.

  It is against this backdrop to wean people away from putting their savings on inert metals like gold, the 2015-16 NDA budget outlined a plan to monetize domestic gold that allows depositors to earn interest in their metal accounts and jewelers to receive loans against such deposits. It was also proposed to offer sovereign gold bonds to investors as an alternative to bullion with the bonds fetching fixed rate of interest that are redeemable in cash at the face value of the metal. With the Union Cabinet yet to giving its nod to this crucial proposal, the longer the plan gets delayed when the price plunge of gold is playing out, the greater would be the difficulty for the authorities to hard sell this well-laid plan! Already, the Gold Deposit Scheme (GDS) notified on September 14, 1999 to bring privately held stock of gold in circulation and to reduce the nation’s dependence on import of gold and provide its owners with some income besides freeing them from the onus of storage, movement and security of gold in their possession, did not pan out any worthwhile gains to the treasury with its abjectly low interest rate and other riders. 

Unless a root-and-branch reform in the mindset of gold lovers is brought about soon through sustained campaign involving celebrities and tinsel stars to strip the inert metal of its inherent meretricious value, any solution for the gold bug from the mandarins of the Ministry of Finance will turn out to be either a wild goose chase or a will-o’-the-wisp!   IPA