Posted By Professor Vaidyanathan on January 18, 2012 in Columns, Featured

India is one of the largest buyers of gold in the world. More than 90 per cent of this is for jewellery purposes and not for Industrial purposes. Table 1 gives the purchase of gold for jewellery by different countries in the last few years. In the past, Indian demand was nearly 30 per cent of global consumption. Recently, the attraction of smuggling has come down due to liberalized import policy. Incidentally, domestic production of gold is very negligible, running into a few tonnes.
The purchases made in Middle East is also mostly by people of Indian origin and to that extent the demand by “Indians” is much larger. What is bought in Gulf states this year by the NRIs (non-resident Indians) will reach here may be in a year or so. At an average price of, say, Rs20, 000 for ten grams, we can estimate that for 1000 tonnes nearly Rs.2 Lakh crore has been spent in buying gold last year by Indian households, which is much larger than the aggregate capital raised from the stock market.
The purchase of Gold by households is not treated as savings in our statistics. It is treated, as consumption by households which are curious as households treat purchase of gold as “investments” whatever the economists in government may think. That the Gold is in private hands is important to note and since it is not with government it is productive. It is interesting to note that the demand has been around 1000 tonnes in the last two years and of this 25 percent is for Bar/coin investment.
But why do households invest in gold?
It is not for the return but for security. Gold is the major social security for large number of Indian households which do not have any social security at all. Kindly observe that nearly 90 percent of India is self-employed. The problem is more acute for the wives of these self-employed, as they do not have any independent access to income or savings. Even if they work, it is used for current consumption. In the poorer segments, a good portion of the income of the man could be used for drinking, gambling, etc., and hence not much left at old age.
The joint family system is breaking down and so the traditional support models are getting weakened. Under the circumstances, it is but natural that the Indian woman would like to own some assets which are useful in old age, or in case of any other eventuality. Real-estate is relatively costly, not divisible and not portable. Gold ornaments are portable and divisible. A chain can be converted into two bangles and also one can have smallest nose ring or ear stud unlike land.
Transfer of ownership is also very easy. In the case of gold ornaments one can say that possession is ownership. In other words, if a mother removes her chain and gives it to her daughter then it belongs to the latter by tradition. One can get loan against gold by pledging it with a moneylender any time of the day or night, seven days of the week. The millions of moneylenders are actually the ATM (All Time Money) of our country, as they act as money vendors with a personal touch too. In other words gold represents the most liquid form of asset in India. One can also say that gold is the most politically correct metal, which can be owned. In traditional Indian families, sometimes, shares or fixed deposits are disposed without the knowledge of the housewife. But gold is always sold with the concurrence of the housewife. Of course, if it is on her body then it cannot be disposed off without her knowledge.
The so-called superstition pertaining to not removing the Mangal Sutra till the death of the husband is an insurance protection to the woman against rapacious relatives and children. It is assumed that the gold ornaments will work as social security for her in case of major emergency or after the death of the head of the household. The Bollywood blockbusters of yesteryear would invariably have a scene where the heroine removes her bangles or chain to be pledged for the benefit of her ailing husband and it did reflect the ground reality better than the views of experts. Hence, gold is the most liquid, portable, easy to transfer, act as social security and insurance for the middle- and low-income group women.
The Total Stock of Gold is estimated at 18,000-40,000 tonnes by different experts which may be an underestimate particularly after the Trivandrum temple vaults got opened up. That temple alone supposed to hold more than half a billion worth of Gold/Emeralds /Rubies etc
As the largest buyer of this metal in the world, India should play an active role in the international market and leverage our position to shape policies pertaining to gold. Any large buyer of a commodity, say, oil or coffee or zinc or maize wants to, and does, have a say in the accelerated disposal of that commodity in the world market. What does India do? Nothing. Is our government, then, not concerned about the welfare of the people but only about some ideological shibboleth? Why is it so? It is because there is a considerable dis-connect between the government and the middle-class.
The planners and policy-makers are either the socialist type or globalizing metropolitan elites. The Nehruvian socialist experts feel that the middle-class or petite bourgeois is naive to invest in unproductive assets instead of joining the working class in the struggle to get social security for all. This did not happen and even the proletariat opted to buy gold having little faith in the government (of any variety) providing any security at old age.
The globalizing metropolitan elites feel that the middle-class is foolish in investing in gold since the “experts like them” have defined it to be un-productive. They would rather have the middle class invest in share markets and burn their hands and legs. They are concerned about reforming the government pension system which is under severe strain as both the Central and State governments are broke. In such a situation, the most entrepreneurial and hard working, self-employed groups are facing a huge challenge to protect their future. Their position is that of a nut caught in the nutcracker with the socialists and globalisers acting as the two arms.
It is not the Indian woman who is naive or foolish, but the government which is insensitive and ignorant to the issue of leveraging on our strength.
In the context of `Digital Cash’ becoming more active, the number of transactions may rise to trillions and the number of trans-border entities issuing them will also increase. This would be more so with increased outsourcing activities. Since “Digi-Cash” does not have any sovereign guarantee, the role of gold as a medium of exchange and as an underlying standard will increase. As the monetary transactions in the net-based world expand, the concern for the underlying lack of “Sovereign Guarantee” should be highlighted. In the context of a possible death of euro and the decline of the US Dollar, this may not be very difficult to visualize. Along with this, a campaign should be launched by India to bring gold as standard of security (if not as a medium of exchange) and this may enormously help the millions of self-employed in India who own this asset and who have to take care of themselves in the coming decades.
India should also create mechanisms to leverage on the investment category [namely Bars/Coins] of the Gold purchases by middle class in the last few years. Innovative mechanisms can be created by government of India to facilitate this gold to be invested with banks and earn some nominal interest rates so that Government can show large stock of gold in banks to facilitate the stabilization of rupee value. Actually much of these coins and bars are already kept in bank lockers and locker fee is paid by the middle-class.
But in order to initiate any such steps Government of India should come out of its Nehruvian mindset and stop taking advice from Globalizers who will sell all these Gold along with our housewives to Global corporations. India should co-opt China in this global campaign to make Gold a unit of security when sovereign guarantees are not taken seriously.
One thing should be clear. Gold is brought by the women of the country. They are smart and shrewd- they will not do anything which do not make economic sense even though most economists do not have any sense pertaining to Indian realities.

The author is Professor of finance at IIM-Bangalore—Views are personal.

R.VAIDYANATHAN
PROFESSOR OF FINANCE
INDIAN INSTITUTE OF MANAGEMENT