“This could partly be explained,” they write, “by purely economic considerations, such as the fact that especially for many rural households, gold is just about the only form of safe and trustworthy investment available as they don’t have ready access to financial institutions or property markets.”However, even for those with greater investment choices, gold could have a compelling appeal. “Gold,” Dehejia and Subramanya argue, “…has outperformed other equities in the Indian market. In the five years before October 2011, for instance, gold rose in value by more than 25 percent on average per year when measured in rupees per ounce. By comparison, a one-year bank deposit grew only at 8 percent, and the BSE Sensex… a little over 6 percent per year during the same period.” Such evidence is telling. Not for nothing is gold called the ultimate defensive investment. People turn to it in times of catastrophe and war, uncertainty and recession, when certitudes and securities seem scarce.
In the past year, the surge in gold purchases and imports has troubled the Indian government. Along with a spiralling oil bill, it has contributed significantly to the current account deficit. It has also depressed desirable consumer savings and spending. In the normal course, the money spent on gold would have gone into anything from mutual funds to financing a new car.
The government has responded by making it more difficult to get loans against gold from private financial institutions, and by applying new duties on gold imports. Further measures of this nature, from additional import taxes to a curb in import volumes, are said to be contemplated. They may well form part of the Budget menu later this month.
Finance Minister Chidambaram’s concerns as to the current account deficit are understandable. Nevertheless, the manner in which gold is being treated amounts to both misdiagnosis as well as mistreatment. If Indians have been turning to gold in extraordinary numbers in the near past, it is precisely because of a lack of credible options in India, a belief that the capital markets remain volatile and potentially at risk, and an absence of trust in the medium-term growth and policy environment. The gold fever is a consequence of the economic mess India finds itself in; it is not the cause.
As and when the economy begins to recover and faith is restored, there will be the inevitable, if gradual, shift from gold to other instruments. To induce an inorganic aversion to gold by reintroducing controls is a remarkably mulish approach. It will only result in angularities such as duty evasion. It is worth noting gold prices have begun to soften internationally following early signs of resurgence in the American economy. If this is how investors behave in developed markets, why should their Indian counterparts do any differently?
The gold example is more than a story, it is a parable. Exactly how it is understood will demonstrate if the UPA government has identified the fundamental credibility crisis and pessimism that has driven down the economy or whether it continues to be in denial. Sentiment was not helped in 2012 when the previous finance minister, Pranab Mukherjee, chose the most inopportune moment to stubbornly introduce a retroactive tax on certain types of foreign investment. It was not helped when leading economic advisers of the government began talking loosely of higher personal income taxes and even the toxic inheritance tax.
To attempt to force people to stop buying gold is yet another fool’s errand. As the old saying goes, if you want to shorten a line you can either vigorously erase part of it or simply draw a longer one next to it. Address India’s confidence in its economy. The gold frenzy will take care of itself.
No comments:
Post a Comment