I have been a long-standing critic of the Indian penchant for buying and hoarding gold.
During the 1980s to the 2000s the price of gold fell steadily in the world market, thanks to a strong US economy, but Indians kept buying gold. I once calculated that the 20,000 tonnes of yellow stuff that it is estimated Indian households keep under their charpoys lost a notional sum of tens of billions of dollars in value during that time. Capital that if it had been invested in the economy would have added a percentage or two points to the Indian GDP growth story.
Which was the other problem: not only was this an asset that was losing value (outside India, the price was holding up inside) it was simply huge mountains of money sitting around doing nothing in a country that was starved of capital.
Today, of course, the price of gold has soared as the dollar has soured. But I haven’t changed my opinion. The national gold bug is still anti-national to India’s interests.
Mind you, only a handful of Indians are buying it as a hedge against the dollar. They are, however, buying it as a hedge against domestic inflation. Which sort of makes it worse: they are buying when the price is high, which makes it an even worse blot on the national account book.
The consequences are already evident in India’s spiralling trade deficit and widening current account deficit. India’s monthly trade deficit hit nearly $ 14 billion in March and we’re heading for a dangerously large trade deficit. The main culprit for the deficit is oil. India imported over $ 105 billion last fiscal year. But second were record gold and silver imports totalling $ 61.5 billion in the same period.
One can fully understand the individual actions of Indian households. With inflation over 10 per cent, putting money in a bank account is the equivalent of watching it shrink. Putting it in gold which, for now, is holding its own in price terms makes sense. Sure enough, total deposits in bank accounts fell last fiscal.
But I still wince at the thought of so much money being, in effect, buried in the ground rather than building so many things that India needs more than jewellery and biscuits.