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India s government tries to curb imports of gold again
Mar 26th 2016
A SMALL room on the eighth floor of Mumbai s former cotton exchange is where
jewellery goes to die. At the Master Bullion Assaying & Hallmarking Lab in the
heart of the gold district, superheated crucibles melt elaborate bangles and
earrings into bars a central banker might recognise. This alchemy is being
promoted by the government under a new monetisation scheme designed to reduce
India s imports of gold: the melted bling can be traded for a bond which will
return the same amount of gold several years down the line, with interest of up
to 2.5% in the interim.
Gold is the bane of India s exchequer. Indians vie with Chinese as the world s
biggest consumers, buying just under 1,000 tonnes a year and stashing it in
anklets, safe-deposit boxes and Hindu temples. As all but a few bangles worth
is imported, only oil accounts for a bigger share of India s trade deficit. To
put it another way, the imports cost India more dollars every year than it
attracts from foreign institutions investing in stocks and bonds, points out
Ajit Ranade, an economist.
Although Indians have traditionally used gold as part of a bride s dowry and as
an offering at temples, demand has ballooned in recent years. In 1982 they
consumed just 65 tonnes of the stuff. Decades of inflation and a much-debased
rupee have pushed savers towards what is, in effect, a convenient way to
insulate their nest-egg from the poor decisions of India s policymakers (and,
just as often, from its tax inspectors). In rupee terms, in other words, gold
has been a stellar investment.
Getting Indians to forgo gold for weddings and religious offerings is probably
a non-starter. Easier to target the portion that is bought as an investment,
especially in rural areas where banks are scarce and mistrusted. The government
hopes it will gather 50 tonnes of gold through its bond scheme a modest target
given the country s 20,000-tonne pile. Yet four months in only three tonnes
have been gathered.
That is hardly a surprise: government schemes to collect gold have disappointed
since at least 1962, when Indira Gandhi, then the prime minister s daughter,
handed over her own finery to finance a border skirmish with China. Though gold
and a government bond backed by gold are much the same on paper, they do not
hold the same appeal for those who favour gold as a store of value. Indians who
are comfortable with paperwork and banks simply aren t big holders of gold,
points out Gurbachan Singh, an economist at the Indian Statistical Institute.
By the same token, most Hindu temples, many of which have hoards of gold
donated by the pious, have steered clear of the scheme, despite pressure from
the government.
Policymakers have other ways of making gold less appealing. A modest excise tax
in the recently unveiled budget has kept jewellers across the country on strike
for a month. Gold sellers were already furious at import duties and rules
forcing them to identify customers buying more than 200,000 rupees ($3,000)
worth. In addition, the central bank is discouraging lending to buy gold.
Several trends suggest gold may eventually lose its lustre. Inflation has
fallen dramatically, reducing its value as a hedge. A government scheme is
giving hundreds of millions of people bank accounts for the first time,
providing them with an alternative way to save. Young people are said to be
less interested in wearing gold jewellery than their parents.
If the government really wanted to accelerate this shift, it could change its
own ways. Various laws steer a big share of bank deposits into low-yielding
government debt and agricultural loans. That, in turn, means that Indians earn
little interest on their savings, enhancing gold s relative appeal. Such
financial repression helps the government fund itself cheaply. But it means
that Indians are sitting on gold equivalent in value to four months of economic
output. That could be financing productive investments instead.