Will someone tell Rajan & FM that Indians have already monetised their gold?

A few weeks back, the Reserve Bank of India (RBI) announced draft guidelines for a “gold monetisation scheme” under which people holding gold can make their “unproductive asset” earn a return of, say, 1 percent – in metal. Anyone with a minimum of 30 gm of gold, as coins or bars or jewellery, can get her gold assayed, assessed and deposited with banks to get a return that would be free from wealth or income tax.[caption id=“attachment_2285242” align=“alignleft” width=“380”]  RBI Governor Raghuram Rajan (L) and Union Finance Minister Arun Jaitley. Image courtesy PIB[/caption] Huh? Someone should tell the mandarins in Mint Street, or North Block, that as far as ordinary Indians are concerned, gold is already a monetised asset. Monetisation is the act of converting something into money, and gold has already achieved that status. People save in gold for difficult times, they borrow using the yellow metal as collateral, they beat it into jewellery when then have to gift it to a daughter, and melt it back into coins or bars when they want to salt it away for the future. No one I know thinks he has to pay tax on gold. For taxes are paid only when you declare what you hold, and gold is not something you shout about from the rooftops. If the RBI and the finance ministry think they deserve kudos for providing a “solution” to a “problem”, they ought to have their heads examined. The gold monetisation scheme is a “solution" to a “problem” that only exists in the minds of babus and economists. Beyond this group of busybodies, no one in India - and certainly not the man on the street - is losing any sleep over gold. This is why artificial solutions will not work. Terms like “barbaric relic” and “unproductive asset” are used pejoratively to run down the average Indian’s love of gold. But they have continued to ignore the cacophony and continue to buy gold – a little less when it is expensive and a little more when it is cheap. They see value in owning the metal. The real question is: why are governments and moneymen so obsessed about putting gold out of business? Why are they trying so hard to grab people’s gold when the latter are showing no willingness to give them up? Of course, there is the CAD explanation: too much gold import is pushing up the import bill, and hence the current account deficit (CAD). But, surely, the babus know what to do if matters get out of hand: tax it till it hurts. This is what the UPA did when the rupee seemed headed for Rs 70 to the dollar. Beyond reducing the immediate import bill, it achieved precious little. The larger philosophical question to ask is this: when the collective wisdom of 121 crore Indians is being called into question by a few people in the policy establishment, whose views should you go by? It is time to question the sanity of the latter rather than the former. The RBI and North Block should stop messing around with gold and instead try and understand why people buy gold when they can. Here’s a primer for them. First, the ordinary Indian does not see gold as an “investment” even though it is a form of saving. Not all saving is investment. Ordinary people will save money no matter what the interest rate is. They may save more if the rate is attractive, they may save less if it isn’t. But they will save. People saved before there were banks; thus they will buy gold as a form of long-term savings whenever they can afford it. Gold has held its value against inflation over the long term, and every Indian knows that. Second, gold is money, not just a piece of barbaric metal. Economists tend to forget that gold has always had exchange value since time immemorial. Anything which has exchange value is a form of money. Even the poor know that gold will always have value, while paper money created by fiat can lose value when governments run mindless deficits over long periods of time. Gold is guaranteed money; paper money can be debauched by government. Third, gold is the poor man’s Swiss bank. When you put money in a Swiss bank, it is less about returns and more about finding a safe haven which guards the core capital, retaining its current value well in the future. Any positive return is a bonus. Given the anonymity of gold, governments cannot control its use or hoarding. This is why the ordinary Indian has faith in it. Anything the government can control can be confiscated too. No Indian really trusts the government. Gold reigns when mistrust reigns. Fourth, gold has use value, too. Most Indians like gold jewellery and hence the normal rise and fall in gold prices does not faze them. Gold is like that painting you love to hang in your living room. As long as you like seeing it on your wall, you will not worry about the price you paid for it, or its current value. If it appreciates, well and good, if not, you still get psychic value from seeing it adorn your wall. Fifth, the Indian public will believe you when you act out your beliefs, not when you give unwanted advice on gold. If gold is an unproductive asset, why is the RBI holding $19 billion in gold? Why not give this away? What is the logic of telling Indians to part with the metal and then hoarding it yourself? The average Indian buys gold for the same reason the RBI does: to stash it for the rainy day when all else loses value. Let’s remember, paper currency evolved from gold, and not the other way round. Bankers’ receipts received against gold coins were what became currency. In due course, the acceptability of paper money replaced gold as currency, and populist governments saw a golden opportunity to use the print press as a substitute for sound economic policies. Indians love gold because they know it cannot be debased. They know it is money, real money, not just paper. Now, why don’t governments understand that? The most sensible thing for Raghuram Rajan and Arun Jaitley to do is to let Indians keep their gold and work on ensuring that the value of the paper rupee maintains its value over time.  At some point, Indians will tire of the risks associated with the metal, and shift to paper rupees, if it can be trusted to not lose value. The only way to make gold unattractive is by making the rupee more attractive to hold. Surely, Rajan and Jaitley have better things to do.