How Do Fluctuations In The Gold Rate Affect The Indian Economy?

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Indians are hungry for gold. Whether it’s for investments, gifts, as tribute to deities, weddings or any festive occasion, gold is an important part of the equation.

Indians are hungry for gold. Whether it’s for investments, gifts, as tribute to deities, weddings or any festive occasion, gold is an important part of the equation.

Gold is considered to be a symbol of prosperity, good fortune and has an inherent value in terms of purity and wealth. According to reports, Indians in India hold more gold than any other population in any other country. While the reasons for this are many, the fact remains that Indians buy and hold gold as a cultural norm.

This insatiable hunger for gold has resulted in India’s gold imports constituting a massive 12.50% of its total imports in 2012-13, which is a whopping $61,409 million dollars. In 2012, the total gold production in the world stood at 4,130 tonnes, and India imported 26.12% of that (1,079 tonnes) – one fourth of the world’s total gold production.

A country’s exports must be more than its imports to maintain a favourable balance and grow the per-capita income of the country. As of December 2012, we have a current account deficit of 6.7% (experts, analysts and the RBI says that we can sustain only with a maximum consistent deficit of up to 2.5%). To counter this, the RBI has implemented an 80:20 system, wherein 80% of the imports would be used to satisfy domestic demand and 20% would have to be re-exported after value additions, by turning gold bricks into jewellery.

In 2011-12, around 56% of all the gold that was being imported came through banks who sold it to the public in the form of coins. In 2013, the Finance Ministry banned banks from selling gold coins in an effort to control the expanding current account deficit (CAD).

Gold also affects the Indian economy because it is a non-productive asset. As a commodity, gold does not add any real value to the productive capacity of the economy. Most of the gold that’s purchased in India is stashed away in lockers and safe boxes, or gets converted into jewellery. Those who hold gold are just waiting for it to appreciate so that they can see some income and returns on investment, or just hold it even after it appreciates to increase their personal wealth.

Gold is used in India as a form of tackling inflation, and holding an item with an intrinsic value because of its rarity is a good way to counter the fluctuations in fiat currency. As a traditional form of savings in India, gold instils a feeling of comfort and security in a person’s wealth. This has been termed the “exposure effect” by psychologists.

While holding financial gold and gold in the form of ETFs and E-gold is a prudent investment, holding physical gold in the form of a real asset is preferred for the simple reason that it can be held, felt and kept safe in a box. This experience of physically owning gold is important to Indians, and is another reason why we like gold so much – it’s safer in terms of real value than the Rupee, and appreciates over time.

The government is also raising its import duty to combat the rising import rates of gold. Between January 2012 and 2013, the import duty has been raised 5 times from 1% to 10%. This move has been mimicked by Sri Lanka as well, in an attempt to curb gold smuggling.

Among India’s three primary imports – crude oil, cooking oil and gold, only the first two are vital necessities. There are small things the government can do to decrease the damage dealt by the massive amounts of gold being imported. One of these is to reduce the amount of non-essential imports (how much we import is mentioned in brackets) like spectacles (Rs.336 crore), dolls (Rs.431 crore), cosmetics (Rs2,713 crore), etc. Educating the unemployed masses in the production of these items can massively reduce the dependency on importing them, tilting the international trade scales in our favour while consequently creating employment and may even help boost exports.

People buying gold do so without keeping in mind the macro-economic ramifications and damage caused to the country’s economy, but obviously cannot stop buying gold due to the lack of an alternative investment medium that has the same benefits as gold. There is also an inborn sense of trust in the value of gold, in that it will always hold some value even if all other forms of wealth like fiat currency and bank balances are somehow devaluated or inflated, for whatever reason.

Acts as simple as purchasing gold as an investment affects the condition of the economy, as at least one million other Indians are purchasing gold on the same day for the same reason, somewhere else in India. Consider investing in other mediums and vehicles that will offer you excellent returns on your investment, you might just be saving the economy.

Read more on Gold

Gold Rate In Metro Cities
Gold Rate In Other Capitals
Gold Rate In Other Major Cities
Gold Rate In States
Bank Gold Schemes

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