How Does Gold Investment Affect Indian Economy?

The decline in the value of gold in the recent past has been so rapid that one could be forgiven for comparing it with the recession in Greece. However, Indians’ lust for gold is no secret, but it has now reached a point where the nation’s economy and its currency are being sacrificed in the bargain as the precious metal has fallen for three straight years.

The purchase of gold from foreign dealers for billions of dollars has resulted in Indian cash being sent overseas and a disruption in the balance funds coming in and going out of the nation, thus bringing down the rupee’s value. As a result of the fiasco, key imports have become more expensive and business are beginning to find it increasingly hard to repay international loans.

Gold imports and Current Account Deficit (CAD)

Gold imports directly affect the current account deficit (CAD) of India. As a thumb rule, the larger the CAD with respect to GDP, the riskier it is for the overall economy. The country is presently the largest importer of gold on the planet, consuming one-third of the planet’s supply on an annual basis. In fact gold is the second-most purchased overseas commodity after oil. Imports went to such high levels that during the UPA government, then-Finance Minister P. Chidambaram had appealed to Indian consumers to try and resist the temptation to purchase gold as it would have a positive impact on more aspects of the nation’s economy than could be emphasised.

While the current account deficit of India has been controlled to some extent by the present NDA government, the main question on the minds of financial and economic experts is whether or not sufficient funds are flowing into the economy to compromise for the difference.

Gold as a means of saving

Gold is looked upon as one of the best options when it comes to security and savings for a good percentage of the 1.24 billion people that reside in India. There may be various reasons as to why gold is treated in high regard in comparison with other investment instruments, but the fact that India is home to around 6,50,000 villages and only around 36,000 of those have a bank branch tells a whole story altogether. With a large portion of peoples’ savings going into gold which they are likely to keel idle until they need the money, the economy is left wanting. This gold doesn’t flow in the overall economy and as such does not contribute toward it.

Gold jewelleries and the Indian economy

In addition, the cultural importance of gold makes it instrumental in ceremonies such as weddings. And it’s not just the villagers who offer gold the amount of significance they do. Even lawyers, bankers, politicians and others purchase gold jewellery during festivals or special occasions. They consider it a fool-proof financial strategy, and since the real estate and capital markets are losing promise off late, the wealthy section of Indian society is now a new class of gold investors on its own. Though the demand for gold has always been high, the past four years have seen the demand turn into an investment and everyone who has the money goes in for gold, thereby adversely affecting the Indian economy.