Opinion
Indian Craze for Gold Sinks Economy
I found it rather odd that the Indian Finance Minister had to be beseeching people of the country not to buy gold. He has requested everyone not to buy gold for at least one year in view of the mounting current account deficits. Rising demand for the precious metal, he said, is met increasingly by imports which push up the trade deficit, impacting on balance of payments. The consequential mounting current account deficit is causing scarcity of dollars weakening the rupee. Lately the rupee has lost heavily against the dollar and is now pegged around 58 to 59 to a dollar.
Reportedly around 95% of the requirement of gold is imported. In the month of May this year alone 162 tonnes of gold was reported to have been imported. Gold is only next to crude oil for the import of which billions of dollars are expended annually. With the economic slowdown in Europe and elsewhere our exports are slack, unable to match the outgo of dollars for imports. Dollars have thus become scarce, seriously affecting the value of our own currency. If this situation persists prices of all consumables are likely to rise, adding to the prevailing high rate of inflation. Apart from a few millions sinking into poverty a fear has been expressed that we may face a 1991–like situation when we had to mortgage away our gold. Perhaps, the appeal of the Finance Minister has to be viewed in this context.
But one must point out that making an appeal is not really enough. Our people are largely cynical and indifferent to all that happens around them. It wouldn’t be too much to say that they are basically self-centred in most respects, more so in respect of securing their lives and those of their dependents against emergencies. Renunciation cannot be expected from them in this respect, particularly when they see politicians and their relatives filling their own coffers by corrupt means regardless of the country’s difficult economic situation.
Gold has traditionally been considered an ideal form of security against financial emergencies. The stock market see-saws frequently causing enormous losses to investors, investing in real estate is full of risks and hassles and returns on deposits don’t beat the prevailing inflation rate. Investment in gold, however, is not only risk-free but also hassle-free. It can be bought right off the bazaar. Middle and upper classes, therefore, load their daughters with gold while marrying them off. The demand for gold for this purpose is born out of age-old tradition and has, of late, been effectively stoked by the daily TV soaps where women of the house are shown all the time loaded with gold ornaments from head to foot.
Even the corrupt involved in cases of astronomical sums of money find gold convenient for salting away their ill-gotten pickings. Whenever law enforcement authorities have chosen to raid the corrupt – their incidence are few and far between than what it should have been –they have come across tonnes of gold in the shape of bricks and ornaments. For the corrupt gold is easier to exchange for goods and services as also amenable to easy concealment. Very few have been daring enough to flaunt their ill-gotten gold in the shape of furniture, cutlery, golden coronets for their deity and so on like the one-time mining magnates Reddy brothers of the “Republic of Bellary” who are currently cooling their heels in a Hyderabad prison.
Gold, therefore, is something which is precious and continues to be chased by the rich or poor and by the corrupt. Its demand is highly unlikely to wane at any time soon unless restrictions are placed directly or indirectly for its acquisition. The government had recently tried to curb its demand by increasing the import tax on it from 4 to 6%. In the context of the escalating unsustainability of the current account deficit it was a feeble attempt. If the import of oil and gold are the villains it is the latter that needs to be up against the axe. Oil imports cannot be curbed for reasons that are too obvious. It is gold the import of which can be restricted, if not by a ban, at least by hiking the import tax which, the experts say, should be raised to at least 20% to make it effective. Its price may go through the roof, giving the smugglers a field day. If criminality gets promoted, so be it. At least the economy would be saved. Smuggling, however, is something that the government can always clamp down upon with stricter vigilance.
The Finance Minister recently opined that there was no need to panic over the falling Rupee. He may not feel panicky and, ostrich-like, also claim that the economy is stronger than what it was this time last year. Regardless of what he says, a weak rupee adversely affects people in myriad ways, most important of which is the rise in prices, especially of fuel. The oil marketing companies recently raised the price of petrol by as much as Rs. 2 and hikes in prices of diesel and LPG may not be far away. When that happens, it will have a proverbial cascading effect on most commodities. Besides, in a globalised economy the cost of everything that has an import-content will go up. Already the manufacturers of consumer goods and electronics have threatened to pass on the excess costs of imports to consumers. The ministers and other politicians need hardly panic over the price rise as most of them are billionaires and have adequate cushioning to tide over such minor contingencies; it is the people at the lower economic strata making an honest living will face the music.
To meet the mounting trade deficit the government, apart from curbing gold demand, would also need to look out for opportunities for increasing exports not only by diversifying the product range but also by exploring possibilities of markets in countries that are not traditional importers of Indian products. Our export earnings need to match the mounting costs of imports or else we are likely to become an economic basket case.
Vigour has to be brought back into manufacturing and infrastructure spruced up. Action is, reportedly, now being initiated to “unlock” investments in projects amounting to a mindboggling 7 lakh crore (seven hundred thousand billion). Some of them are World Bank funded and others relate to infrastructure that have been languishing for want of clearances at the central and state levels. The PM directed their fast-tracking and ordered constitution of a monitoring group within the Cabinet Secretariat to keep a keen tab on them.
To me as a layman, it appears to be a little shameful for the government to decide now at such a late stage to start monitoring progress of approved projects when things seemingly have come to a crunch. This should have been happening all along. I recall, while visiting Malaysia under the Advanced Professional Programme on Public Administration conducted by the Indian Institute of Public Administration in 1981, our group was told by a representative of Malaysian Government that all projects of more than 100,000 dollars (the then Malaysian currency unit) were being monitored by the Prime Minister. Why have we been so sluggish in doing what other countries richer than ours have been doing for decades?
27-Jun-2013
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Proloy Bagchi
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Import of gold in large quantities is not the only reason for the fall in the value of the Indian rupee just as it is not the only reason for the adverse trade balance. But the fact is that the excess import of gold has greatly contributed to both the phenomena. Besides import of tonnes of gold has resulted in avoidable outgo of foreign exchange which is not being earned by exporters in enough quantities on a/c of the slowdown in the rich economies. Traditions do need respect but they sometime harm the general wellbeing as was observed recently in Uttarkahnd where pilgrims in millions have been travelling every year at the cost of the environment. The new found wealth among the newly emerging middle classes has contributed to unmanageable crowds in places of pilgrimage as also excessive consumption of the precious metal. A time comes when such observance traditional practices become unsustainable and they need to be curbed. |
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Traditionally, gold has a sentimental value for Indian households apart from its investment value. Therefore, the appeal by the Finance Minister looks more like political rhetoric than any sensible address to the nation - a country otherwise reeling under the impact of inflation, corruption and exploitation.
Truth is always bitter and candid speaking is always a dangerous proposition. But the fact remains that owing to the unjust, unfair and corrupt governance of the country for more than six decades now has resulted in serious disillusionment among the common citizens of the country. As a matter of fact, India has devolved into a plutocracy under the guise of democracy. As a fall out of this, Indians are, particularly, not very patriotic in character. This is evident from massive brain drain from this country. Hence, the appeal of the Finance Minister is bound to fall into deaf ears only.
Vested interests at every level have choked the promises of massive foreign investment expected a decade ago to convert this country into a giant economy - " The Asian Tiger" myth. But unfortunately, we have not yet liberated ourselves from the feudalistic mindset; our "Sahebs" are still demigods - knowledge, wisdom, prudence begin with them and end with them. And other than the overt or covert self interest, they also speak the language of the god, which is, not surprisingly, very unintelligible to the foreign investors.
All economic policies and decisions are either highhanded - taken in panic or haste or are colored by political compulsions. There is hardly any economic road map or clarity in our economic objectives. I am reminded of E.M.Foster's novel -" A Passage to India" which conveyed the message - India is a muddle. After several decades, pathetically, we are still a muddle.
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Gold has been in demand 2 years, 5 years, 10 years and 20 years back too.
What has happened in recent 2 years that INR has depreciated against USD ? It can not be the import of Gold for sure.
There are other factors which are actually responsible for depreciation of the INR against USD (and other currencies as well). By constraining consumption of Gold by Indian public, those factors will not be affected. So, by reducing import of Gold, the Indian forex reserves will get a temporary relief. But, in absence of meassures to control and tackle those real factors that cause trade deficit, the problem will surface again later.
But, by then the FM and the UPA govt would have gone, and they will claim failure of the new govt to control the trade deficit.
The FM is providing an excuse. An excuse good enough that the media would buy and sell to the Indian public.
By the way, if the govt is so serious, it can initiate to bring back some black money abroad that would bring USD back to 40 INR !! |
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Educative article for it is well-reasoned |
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