In the small print of the Union Budget 2019, was a big increase of 2.5% in the import duty on gold. While former President of Gems & Jewellery Council of India, Ashok Minawala, reacted, “This has come as a shock,” those who supported the increase claimed it would reduce India’s gold demand by a similar percentage. Puzzled and exasperated by India’s gold lust, some Western-style economists have long argued that the immense quantity of precious metal held in private hands in the country constitutes a huge waste of resources. 

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Indian households are believed to hold some 11% of the world’s gold reserves, close to 24,000 tons, valued at nearly $1 trillion. This is much more than the over 615 tons held by India’s Reserve Bank. The US central bank hoard in excess of over 8,133 tons and is numero uno in this table of the world’s gold holdings. We are at number 10. In addition, the quantum of gold in temples all over the land is estimated to exceed 4000 tons, several times what the government has. Just a few shrines such as Padmanabhaswamy (Thiruvananthapuram), Tirupati, Siddhivinayak, Shirdi, reportedly hold jewellery and gold in excess of Rs 1 lakh crore. Think of how many schools, hospitals, roads, and powerplants so much “idle gold” would finance, gold critics argue. To them gold is a dead investment; India’s craze for the yellow metal is akin to mental illness. They want to curb it by all means. When social engineering fails, they resort to taxation.

But will Indians stop buying gold because it has become more expensive? Not really. Since millennia, much of the world’s gold has ended up in India. That is because India itself produces very little gold. Almost everything we have comes to us from outside. But the deeper reason is, of course, cultural. Regardless of religion, caste, creed, community, or class, Indians buy gold. Whether on festive occasions or family functions, acquiring, wearing, and displaying gold ornaments is de rigueur. I was recently at a middle-class Maharashtrian marriage. Though it was a rather simple affair in comparison, say, to a big fat Punjabi wedding, I was astounded by the amount of gold jewellery on display. The ladies wore not just traditional gold sets, but sported newer, even latest designs. They had inherited gold ornaments and continued to make new ones.

I cannot imagine that such investment in gold is born only out of a foolish craze or desire to display non-productive assets. True, the money blocked in gold does not earn interest. Nor does it circulate in the economy as money deposited in a bank does. Yet, buying and selling gold does contribute to the economy considerably. Not only do the livelihoods of several thousand artisans and merchants depend on it, but a significant portion of the gold imported into the country is re-exported as ornaments with a beneficial value-addition to the economy. Gold ornaments are also objects of art and aesthetic value which is quite beyond merely the weight and value of the precious metal. In addition, they are considered auspicious and lucky, quite beside their utility or use value. 

But the fact is that the world-over gold is still considered the best hedge against economic uncertainty. Indian families know this only too well. They are smart, not foolish gold investors. That is why the additional duty is such a bad idea. The current price of gold in India has spiked to a new high crossing Rs 35,000 per 10 grams. International prices have also surged over Sino-US trade jitters spurring what economists call “safe-haven” demand. Spot prices have firmed above $1,400 per ounce. There is a simple and predictable fallout of this: increase in smuggling. Whenever there is a substantial gap between the international and domestic prices, smuggled gold is bound to enter into India, often allied or controlled by the underworld. Such illegal gold accounts for almost 20% of what is legally imported.

While the government has started attractive schemes such as interest-earning gold bonds, it should also become the country’s largest pawnbroker through its nationalised banks and post offices. A simple way to do this is by offering more attractive terms than either local pawnbrokers or large companies. The idea is that more of the large amount of gold in the country should be used to shore up our currency and economy. But for that to happen, Indian gold prices have to be globally competitive. In fact, given its perennial attraction to Indians, it is India which should be the world’s leading gold market, with the purest, cheapest, and best gold across the globe.

The author is Director, IIAS, Shimla