Article

Goldbug Nation

Pramit Pal Chaudhuri May 7, 2012

I am a long-standing critic of the Indian penchant for buying and hoarding gold.

During the 1980s to the 2000s, the price of gold fell steadily in the world market thanks to a strong US economy, but Indians kept buying gold. I calculated that the 20,000 tonnes of yellow stuff that was estimated to be kept under charpoys in Indian households lost a national sum of tens of billions of dollars in value during that time. Capital which, had it been invested in the economy, would have added a percentage or two to the Indian GDP growth story.

Which is the other problem: not only was gold losing value (outside India, at least — the price was holding up inside), it was simply huge mountains of money sitting around doing nothing in a country starved of capital.

Today, of course, the price of gold has soared as the dollar has soured. But I haven’t changed my opinion. The national gold bug is still anti-national to India’s interests.

Mind you, only a handful of Indians are buying gold as a hedge against the dollar. Most are buying it to hedge against domestic inflation, which only makes it worse: buying when the price is high makes it a bigger blot on the national account book.

The consequences are already evident. India’s monthly trade deficit hit nearly $14 billion in March and is only growing. The main culprit for the deficit is oil– India imported over $105 billion last fiscal year– but close behind are record gold and silver imports, totaling $61.5 billion in the same period.

One can easily understand the individual actions of Indian households. With inflation over 10 percent, putting money in a bank account is the equivalent of watching it shrink. Putting it in gold (which, for now, is holding its own in price terms) makes sense. Sure enough, total deposits in bank accounts fell last fiscal year.

But I still wince at the thought of so much money being buried in the ground, rather than building the many things that India needs more than jewelry and biscuits.