Taming the gold rush.
The Government of India wants to tame gold. It is moving with full resolve to do so and the budgetary proposals are to be viewed in that light. Why is the Government wanting to tame gold? The reasons are macro-economic. Gold consumption of Indian households has risen to $ 45 billion in 2011 from $ 19 billion in 2009. This rise has contributed to stress on several counts. Domestic liquidity is significantly lower when most of the domestic savings find its way to gold. Even the Government small savings schemes are feeling the pinch as investors have moved away. Foreign exchange management went out of hand with surging gold demand adding to our oil import needs and putting pressure on the rupee.
The result – we have a surging current account deficit in FY 2011-12 (if we did not import any gold, our current account deficit would actually be close to zero). Over the past three years, gold investments have exceeded equity savings by a factor of 11. Even from an investment perspective, this buying binge is absurd as most of the buying has happened around the 10 year-high in gold prices. If money moves away from gold, Capital would be available for more productive purposes. We will need lesser dollars as most of our gold is imported. Our currency will see better times vis-a-vis the dollar. In rupee terms, we may be able to reduce our oil import bill if the rupee appreciates.
Our current account deficit will look very respectable leading to better macro-economic numbers and improved sovereign ratings. The stock markets will get a better share of domestic savings and capital will be put to more productive purpose. The Government is right in wanting its citizens to put their savings to better use than buying gold and putting their savings to sleep. To expect foreigners to fund our future growth needs without ourselves adequately contributing to it maybe our biggest economic folly as citizens of India. The government is absolutely right in correcting this wrong.