India also has a very strong informal system of exchange where gold can be rapidly turned into cash, especially in times of emergency…
Mint, New Delhi, India
Sunday, January 12, 2020
The price of gold crossed 40,000 rupees per 10 grams last week. Since the beginning of this fiscal year, gold prices have surged by around 25%, driving down gold imports by a fifth during the same period. So Mint here takes a look at India’s love for gold.
By how much have gold imports reduced?
Between April and November, India imported 533,376 kilograms of gold, around 20.3% less than the 669,339 kilograms imported during the same period in 2018. This is hardly surprising since gold has turned costlier this fiscal year.
Between April and November the average price of gold was 35,337 rupees per 10 grams, against 30,689 rupees during the same period a year ago. Since November prices have rallied higher due to Iran-U.S. tensions. Over and above this, the easy-money policy of the U.S. Federal Reserve have made a comeback. The Fed has resumed printing money to drive down interest rates. This has pushed up gold prices as well.What explains the love Indians have for gold?
Since little gold is produced in India, almost all the metal used here is imported. Over the years Indians have continued to love gold. In FY19, India imported 983,000 kilograms of gold, the highest since FY14. A major reason for our love for gold remains tradition. But there is more to it.
As Richard Davies writes in “Extreme Economies,” “Gold also acts as a kind of informal insurance mechanism.” He writes this in the context of Aceh, a semi-autonomous province of Indonesia, and notes how survivors of the 2004 Asian tsunami rebuilt their lives using the gold they had on their bodies.
How did gold help in the aftermath of the tsunami?
As Davies writes: “While some lost gold in the disaster, I met many survivors who were able to sell jewellery they were wearing. … Wearing a gold bangle is like having enough cash on your wrist to employ a builder for a year. … This traditional form of finance insulated Aceh and provided its entrepreneurs with rapid access to cash.”
How is this linked to India’s love for gold?
As in Aceh, India also has a very strong informal system of exchange where gold can be rapidly turned into cash, especially in times of emergency. As Davies writes again in the context of Aceh: “In an economy buffeted by the ups and downs of farming and fishing, the people are used to buying gold after bumper harvests or fishing seasons and selling it after lean ones.” This applies as much to India as it does to Aceh, with the bulk of the country’s workforce still dependent on agriculture for a living.
What do economists make of this system?
Economists, especially those working in the West, are used to banks and a formal financial system being in place and working well, even during emergencies. Buying and holding on to gold doesn’t fit their way of doing things.
But as Davies puts it, “A woman’s gold is both her personal treasure and plays a functional role as the family’s financial buffer.” That is the long and the short of India’s love for gold.
Vivek Kaul is an economist and the author of the “Easy Money” trilogy.
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Toast to a free gold market
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