Gold Bug
Niranjan Rajadhyaksha in Business World
Gold prices have touched a twenty-year high, and an old debate has been resurrected. Is our age-old fascination for gold harmful to the economy? India accounts for a fifth of the world's consumption of gold. Annual imports of the yellow metal are currently around $6 billion. Total gold stocks in the country have been estimated at between $200 billion to $500 billion.
Economists have despaired of our insatiable appetite for gold for almost a century now. The 19th century English economist W.S. Jevons called India a sink of precious metals. This was in the era of the gold standard. Countries issued money depending on the amount of gold held by their central banks. Jevons said that by absorbing the excess gold in Europe, India kept money supply and inflation down in that continent.
John Maynard Keynes noted in Indian Currency and Finance, his first major book on economics, that India's love for precious metals has been ruinous to her economic development. Later, in his General Theory, Keynes wrote: "The history of India at all times has provided an example of a country impoverished by a preference for liquidity amounting to so strong a passion that even an enormous and chronic influx of the precious metals have been insufficient to bring down the rate of interest to a level which was compatible with the growth of real wealth."
The view is still popular among economists and policy makers. They believe that if Indians were to put their savings to more "productive" use, the economy would grow faster than it does today. Gold is the bane of our economy.
What the entire criticism glosses over is why Indians buy so much gold in the first place. The most obvious answer is our cultural affinity for gold. It's an irrational streak that prevents us from making proper economic choices.
But there is more to it than merely this. There is a clue in the quote by Keynes that I have used earlier. He has equated holding gold with a desire to stay liquid. Or, in other words, gold is attractive because it can quickly be converted into cash. This magazine's office is in the heart of Mumbai's working class district, and near it are dozens of pawn shops that offer loans against gold. An attractive alternative for those with no access to the banking system.
Few years ago, Sudhir Mulji had quoted a British civil servant called Findlay Shirras in his column. Shirras said in 1919 that it was the lack of banking systems and poor communications that allowed "our resources to be dissipated (by hoarding) in this appalling manner."
Now, some would argue that the banking habit has spread since 1919, and it's only the poor who need gold as collateral for loans. But I believe gold buying by the middle-class and the rich is not entirely irrational either. Gold is the only global asset that Indians can hold. We are prevented from buying houses in London or shares in New York. So gold acts as an investment in the rest of the world and offers protection against the decline in the value of the rupee. I can think of no other investment that offers these benefits to ordinary Indians.
----
With the government tracking bank accounts and real estate transactions these days, more money may flow into gold. I don't think "rational" reasons can explain the quantum of national demand for the yellow metal. Tradition and culture play a big part; at least that's what I make out from my observations.
Gold prices have touched a twenty-year high, and an old debate has been resurrected. Is our age-old fascination for gold harmful to the economy? India accounts for a fifth of the world's consumption of gold. Annual imports of the yellow metal are currently around $6 billion. Total gold stocks in the country have been estimated at between $200 billion to $500 billion.
Economists have despaired of our insatiable appetite for gold for almost a century now. The 19th century English economist W.S. Jevons called India a sink of precious metals. This was in the era of the gold standard. Countries issued money depending on the amount of gold held by their central banks. Jevons said that by absorbing the excess gold in Europe, India kept money supply and inflation down in that continent.
John Maynard Keynes noted in Indian Currency and Finance, his first major book on economics, that India's love for precious metals has been ruinous to her economic development. Later, in his General Theory, Keynes wrote: "The history of India at all times has provided an example of a country impoverished by a preference for liquidity amounting to so strong a passion that even an enormous and chronic influx of the precious metals have been insufficient to bring down the rate of interest to a level which was compatible with the growth of real wealth."
The view is still popular among economists and policy makers. They believe that if Indians were to put their savings to more "productive" use, the economy would grow faster than it does today. Gold is the bane of our economy.
What the entire criticism glosses over is why Indians buy so much gold in the first place. The most obvious answer is our cultural affinity for gold. It's an irrational streak that prevents us from making proper economic choices.
But there is more to it than merely this. There is a clue in the quote by Keynes that I have used earlier. He has equated holding gold with a desire to stay liquid. Or, in other words, gold is attractive because it can quickly be converted into cash. This magazine's office is in the heart of Mumbai's working class district, and near it are dozens of pawn shops that offer loans against gold. An attractive alternative for those with no access to the banking system.
Few years ago, Sudhir Mulji had quoted a British civil servant called Findlay Shirras in his column. Shirras said in 1919 that it was the lack of banking systems and poor communications that allowed "our resources to be dissipated (by hoarding) in this appalling manner."
Now, some would argue that the banking habit has spread since 1919, and it's only the poor who need gold as collateral for loans. But I believe gold buying by the middle-class and the rich is not entirely irrational either. Gold is the only global asset that Indians can hold. We are prevented from buying houses in London or shares in New York. So gold acts as an investment in the rest of the world and offers protection against the decline in the value of the rupee. I can think of no other investment that offers these benefits to ordinary Indians.
----
With the government tracking bank accounts and real estate transactions these days, more money may flow into gold. I don't think "rational" reasons can explain the quantum of national demand for the yellow metal. Tradition and culture play a big part; at least that's what I make out from my observations.