Millennium Post

Saddled with golden irony

The main entrance of the Reserve Bank of India’s  (RBI) office on Parliament Street in New Delhi is guarded by two massive figures of Yaksha and Yakshini, the mythical figures who guard the immense divine wealth. The larger-than-life statutes in sandstone are the works of the famous sculptor Ramkinkar Beij. As a sculptor, Ramkinkar has given his creation a look of determination. The irony with Yaksha is that for eternity he is only guarding the wealth; he can never enjoy any of it.

The irony with India is something similar as the mythical Yaksha. For ever India is buying gold. But to no purpose. In fact, we are buying gold much to our national distress. As gold buying is rising, the external deficit is worsening and our standing in the world in going down. Last year, India imported gold to the tune of $60 billion and even if we can by and large wipe out that amount, the trade deficit will look a much more manageable.

On 17 May, Standard and Poor’s, the global rating firm, threatened to downgrade India for its poor economic performance. It cited low growth, high fiscal and current account deficit. Come to think of it, when the country is saddled with bulging trade deficit, Indians were on a frenzy buying gold on the day the Akhshya Trittiya day. So much was the demand for the yellow metal on that day, that gold industry and trading circles all over the world were only talking of Akhsya Trittiya.

In fact, for a while gold imports had stemmed. In the wake of imposition of higher duties on gold imports, imports had somewhat abated. But, this shot up again and when gold prices were falling in the global markets. The frenzy has now reached such proportions that C Rangarajan, chiarman, Prime Minister’s Economic Advisory Council, who had earlier advocated against any hikes in gold import duty on the ground that it would result in higher smuggling, had stated this week that gold imports need to be checked.

The problem is Indian gold purchases appear to be price insensitive. India has a gold pot. So any fall in global gold prices should spark alarm about losses. But no. Indian buyers do not see a price fall in gold as a loss to their huge gold hoard; but it is seen as a fresh opportunity to stack up more gold.

On 17 May as well, gold prices fell in the international markets, as the US economy reported better results and the dollar gained strength. Investors who had put their money into gold are now moving back into equities hoping that risk of economic slowdown had receded and the US economy should recover faster. There is also speculation that the US Federal Reserve could stop its bond buying programme which had helped gold to rise. Thus, gold had fallen by 17 per cent over the past one year and speculators in gold expect the price to fall in course of the coming week as well, as reports from Singapore’s commodity exchanges indicate.

Global gold demand has two aspects. One is speculative and investment demand, where commodity investors move in and out of it in expectation of profit on price trends. The other is physical demand, which is, in effect, demand for gold bars or coins or jewellery. The current fall in gold prices have been triggered by fall in speculative demand for gold since alternative investment avenues were looking more lucrative.

From the global market perspective, gold seems to have fractured the world in two separate categories.

While Europe and the advanced economies are selling gold, India, China and Middle East are buying. In the absence of the buying from these countries, gold prices would have crashed to historic lows. Gold demand fell 13 per cent to a three-year low of 963 tonnes in the first quarter, as rising jewellery demand and strong appetite for coins and bars failed to offset a sharp drop in investment, the World Gold Council said in its report. However, physical gold demand is soaring in India, China and Middle East. Premiums quoted in India on gold bars were as high as $5 an ounce, a Bloomberg report stated. Premiums for gold bars in Hong Kong, the main source of gold for China, hit record highs this week on supply constraints.

‘Premiums for gold kilo bars have increased quite substantially. In Asia, gold bars are hard to come by,’ Bloomberg had quoted some market. These figures only prove the divergence in gold demand between advanced countries and the three select regions.

If China or Middle East countries can afford to play out their fancies with gold, India can hardly afford this utterly distractive social preference. An all-out effort is needed to wean away the average Indian from his gold obsession. There should be some efforts to build the profile of India’s gold buyers. Physical gold purchases are no longer from the wealthy. Gold is purchased by the middle class and those who can be said to be in the lower middle income brackets.

Gold purchases should be made more difficult by imposing taxes and insistence on OAN numbers and other details from buyers. At least, the public sector banks should be forbidden from selling gold. Some RBI moves have already been taken.

Gold baggage allowance should be curbed. This can no longer be shied away on the ground that restrictions will result in increased smuggling. It looks as though the risks of higher smuggling and need for higher surveillance are better options than allowing such free imports of gold. IPA
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