Economy Jan 3, 2013
There is a curious thing about Indians' penchant for gold. When the prices rise, they buy expecting the prices to go further up. When the prices fall, they buy for obvious reasons.
But the government is resolved to fight this. And so gold has come under attack again.
According to Finance Minister P Chidambaram, had thegold imports been half of the actual level, that would have added $10.5 billion to the country's foreign exchange reserves.
So he proposes to increase the import tariff of gold to push up the prices, which he hopes will deter the consumers from buying the yellow metal.
In tandem is the Reserve Bank of India. A panel, which was constituted to look into gold imports, has suggested higher import duty on gold import. This is precisely what is on the government's mind.
The panel has also suggested introducing other products like inflation-indexed bonds to wean away the investors from gold.
It is beyond doubt that Indians' attraction towards gold has to be curbed. And the RBI panel's recommendation seems to be on the right track.
For example, while recommending an increase in import tariff it has also cautioned that if raised beyond a level, the move will only increase smuggling. (This has already happened after the government increased import duty in the last Budget)
Another suggestion from the panel is to document gold sales and purchases.
But implementation of these measures will bear fruit only if the government plays its role.
One reason for the increase in investment demand for gold is inflation. So, to curb demand for gold, the first step should be to control inflation. The RBI is already doing its bit on this front, while it is for the government to take steps to address the supply side issues.
Secondly, the government has to introduce steps to make financial assets more attractive than real assets like gold and real estate.
The RBI has expressed its dismay over the decline in the household savings in financial assets.
In FY10, the household savings in financial instruments were 12.2 percent. It fell to 9.3 percent in FY11 and then to 7.8 percent in FY12.
The trend has rung alarm bells and the government, for the first time this year, announced steps purportedly aimed at ploughing back household savings back to stocks and other products.
Sebi has also simplified mutual fund investment procedures.
But these are yet to give the intended results. For, despite a rally and all-round optimism after the so-called reform steps, retail investors are absent from the equity markets.
Moreover, there are signals that demand for gold is only likely to increase this year. According to a report in the Economic Times today, dealers in gold and jewellers see demand rising 10-15 percent this quarter as sales in rural areas are expected to increase.
The rising demand has a pointer to the failure of the government policy in understanding and addressing the cultural reasons for Indians' penchant.
The yellow metal's status as an investment in India is almost new found. For most Indians, it is just jewellery, which is by and large linked to social status.
Gold is also an important part of the dowry (psst!!) in most part of the country.
So, how far will the government's initiatives and the RBI panel's suggestions be effective in addressing such issues? Very little.
As long there are no steps to tackle such traditional and conservative customs still prevalent, gold will remain key for Indians.
On top of all these is the issue of black money. The main attraction of the real assets is that they are an important avenue for those looking to channel their black money.
On the government's resolve to curb the black money flow, less said, the better.
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