Gold: Higher duties will result in more illegal imports

By R Jagannathan

Few weeks after the Reserve Bank of India banned banks from lending any money for the purchase of gold, the finance minister P Chidambaram today said the government is considering steps to curb import of gold by making it more expensive as it is partly responsible for the country's widening current account deficit.

"We may be left with no choice but to make it more expensive to import gold. The matter is under government consideration," Chidambaram said.

In March this year, the central bank tightened lending norms for non-bank finance companies against gold jewellery, they can now lend only 60 percent against the value of gold offered as collateral.

The finance ministry also wants Indians to invest less in gold and more in financial assets that are denominated in rupees - whether it is shares or other pieces of financial paper.

When it comes to gold, all governments see it as a barbaric relic, something that adds no economic value to anybody.

But the actions of governments and central banks tell a different story. If they really believed that investing in gold is pointless, they should be trying to profit from the public's foolishness, and selling their gold holdings.

By flaying Indians' preference for gold, our policymakers are essentially looking for alibis when it is their policies that have dented business confidence and ruined the India story.

They are actually doing the opposite. The World Gold Council (WGC) says that during January-September 2012, gold bought by central backs was higher than in 2011, even though last year was a record one for central bank purchases.

According to Marcus Grubb, Managing Director of Investment at the WGC, till September this year central banks had bought 373.9 tons of gold. "Last year through September, they bought 343.9. So we're looking at another 450-500-ton year for central banks, which is a record since the '60s." (Note: 1 metric tonne equals 1.1023 short tons).

Grubb says Brazil, the B in BRICS, has been the latest convert to gold. And Latin America has been the most aggressive of buyers. Says Grubb: "Brazil's buying confirms a trend we've seen. If you look back over this year and in this quarter, the buyers are Latin American countries - Mexico, Bolivia, now Brazil; they are Central Asian countries - Russia, Kazakhstan, Ukraine; and Far Eastern countries such as Thailand, Philippines and South Korea. The developing country central banks are the ones doing the purchasing."

Put another way, it is not the rich but the relatively poor who are buying gold, whether we talk about countries or people. The emerging economies, who export to the west, are worried about holding an excess of fiat currencies - like the dollar or the euro - in their reserves. When the US and European central banks are busy pumping the world with paper currency to beat their recessions, gold is an important hedge against reserve value depletion due to excess printing of money.

India was one of the early buyers of gold - in 2009, when we bought 200 tonnes of it - and thus our own central bank or government can hardly blame the people for doing the sensible thing and hoarding it.

In November, two former Indian central bankers weighed in on behalf of gold in their own ways, reports The Indian Express.

At a function organised by the National Institute of Public Finance and Policy in Delhi, while C Rangarajan, currently Chairman of the PM's Economic Advisory Council, was mildly critical of efforts to drive gold imports underground by taxing it heavily, another former Governor, YV Reddy, came out more strongly on the side of gold.

Rubbishing arguments that tried to paint gold as an unnecessary indulgence, Reddy asked rhetorically: "If Mercedes Benz and after-shave lotion can be imported, why not gold? It is both an investment and consumption good. Many people seem to mistake that it is only a hedge against inflation. There is a demand for it. It is being imported."

While Reddy went on to add needlessly, "If you can, try to stop it", Rangarajan underscored the point that any such effort was bound to fail and only invite more smuggling.

He said illegal shipments of gold into the country had started rising in the last few months after the budget imposed higher import duties on the metal. "I would say to some extent we should dissuade people from holding an asset which does not give a rate of return. However, you can't go beyond a particular point."

Aarati Krishnan, writing in BusinessLine, makes a strong case for gold by pointing out that over the last four years those who had invested in gold would have grown their wealth better than those who bought shares. She believes that the Indian love for gold has made us more optimistic about economic prospects than the west.

She writes: "Household gold holdings, officially estimated at 18,000 tonnes, represent a whopping sum of Rs 58 lakh crore! What this adds up to is an enormous 'wealth effect'. While investors in the West are now worse off with a moribund stock market and near zero interest rates, Indians are in a sweet spot merely because they eschewed the dubious benefits of financial savings for the joys of buying jewellery."

The moral for our policy-makers is clear. It is the essential conservatism of Indian investors that is paying off in spades right now, and the Indian economy is holding up better than some others.

By flaying Indians' preference for gold, our policymakers are essentially looking for alibis when it is their policies that have dented business confidence and ruined the India story. The Indian public is rightly buying gold, which can't be debased like paper currency.

The moment the India growth story revives, Indians will ease up on their gold fetish.

Updated Date: Dec 20, 2014 20:29 PM

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