Are the gold chains strangulating the Indian Economy?

The day India stood still was the 10th of November, when the
Hon’ble Prime Minister Narendra Modi, gave a “indianized”
seismic shock by demonetizing the Indian Currency notes of Rs
500 and Rs 1000. This is “hopefully” strategic move to curb the
termites of black money and corruption, which has been
decaying the insoles of the country, for decades. But road
blocked is always avoided with a newer better road, a road made
of gold?

The gold imports, which were at a 20-month high, rose by 191%

as compared to 6.39 MT in November 2015. In fact, gold imports
have doubled as compared to October 2016, which was at 9.2
MT. "A majority of the imports took place two weeks after the
demonetization move by the Union government," confirmed Samir
Mankad, executive director, GSEC Ltd

Gold being perceived as a “safe” investment, with a tangibility

and elements of “ pride”, seems a preferable “ road less
travelled”. The night of the demonetization, there was a
tremendous sale of gold at a price exponentially high than the
market prices, clearly explaining and defying the laws of demand
and supply and market stability.

India buys gold more than it buys grains(in value), it has not
consistently topped any world rankings, expect for being the
highest importer of Gold – A non productive, non -viable asset ,
importing 900 tonnes of gold in 2016 worth $70,409 million. It not
only constitutes 12.5 % of our imports but also add to the
deficits( $300 million(2016)) of the country as the exports are do
not commensurate with the imports of the country.

Why is gold mystically preferred by everyone , even when

citizens of a country know that the valuation and importance is
unnecessary .Gold sure does look beautiful ornamentally but
what is the use of such an ornament which can potentially
strangulate you?

The cultural value and norms are unquestionably right in India,

but the cost of your neck chain does not have a pecuniary but
qualitative cost, it is eating up the hard earned money of the
country. (you add something , m not getting the grip)

The rumors of gold ban should not plunge the stock markets, but
be seen not as a sign of tyranny of the government but landmark
in the history of the worlds, where the population supports a
logical step for the greater good of the country’s future.

 This chart contains the average price for gold for per year
since 1964 – present. The prices indicated are for 10 grams
of gold and prices are in Indian Rupees.
 Year Price Year Price
 1964 Rs. 63.25 1989 Rs. 3,140.00
 1965 Rs. 71.75 1990 Rs. 3,200.00
 1966 Rs. 83.75 1991 Rs. 3,466.00
 1967 Rs. 102.50 1992 Rs. 4,334.00
 1968 Rs. 162.00 1993 Rs. 4,140.00
 1969 Rs. 176.00 1994 Rs. 4,598.00
 1970 Rs. 184.00 1995 Rs. 4,680.00
 1971 Rs. 193.00 1996 Rs. 5,160.00
 1972 Rs. 202.00 1997 Rs. 4,725.00
 1973 Rs. 278.50 1998 Rs. 4,045.00
 1974 Rs. 506.00 1999 Rs. 4,234.00
 1975 Rs. 540.00 2000 Rs. 4,400.00
 1976 Rs. 432.00 2001 Rs. 4,300.00
 1977 Rs. 486.00 2002 Rs. 4,990.00
 1978 Rs. 685.00 2003 Rs. 5,600.00
 1979 Rs. 937.00 2004 Rs. 5,850.00
 1980 Rs. 1,330.00 2005 Rs. 7,000.00
 1981 Rs. 1,800.00 2006 Rs. 8,400.00
 1982 Rs. 1,645.00 2007 Rs. 10,800.00
 1983 Rs. 1,800.00 2008 Rs. 12,500.00
 1984 Rs. 1,970.00 2009 Rs. 14,500.00
 1985 Rs. 2,130.00 2010 Rs. 18,500.00
 1986 Rs. 2,140.00 2011 Rs. 26,400.00
 1987 Rs. 2,570.00 2012 Rs. 31,050.00
 1988 Rs. 3,130.00 2013 Rs. 29,600.00

 The gold rate depends on a number of factors like the

stability of the central bank, the supply and demand of gold
in the market, quantitative easing, government reserves, the
health of the jewellery industry and overall yearly
production 
  gold is the second-most purchased overseas commodity
after oil. 

The gold production in India during the year stood at 2.5 tons in 2007, with
production of only 1,564 kg of gold during 2013-14, which is a decrease of
about 2% over the previous year. Gold mining in India is done on a very
small scale when compared to the world scenario of gold production by
other countries.
India’s name is hardly mentioned as it doesn’t produce considerable
amount of gold, despite being the largest importer. In fact, India’s gold
mining gold constitutes about 0.5% of the total gold production in the world,
but India consumes about 700-800 tons of gold per year on average, which
is roughly 30% of the world’s total gold production in a given year.
International gold prices have risen exponentially in the last decade. Since 2000, the
international gold prices have grown at compound annual growth rate of 16.3 per cent.
The domestic gold prices have moved in tandem with international gold prices in recent
years. Volatility in international gold prices in recent quarters is positively skewed
implying that it provides fewer large losses and a greater number of larger gains. One of
the major components of gold demand in recent years has been investment demand at
the global level. Rising gold prices in recent years did not deter the acquisition of gold in
India, implying that investment in gold is becoming price inelastic.

Another reason for the increasing imports of gold by India was the sustained increase in
gold prices in India. The gold prices have increased markedly over the period April 2008
to March 2012. Investors have reaped the benefit of attractive returns as the gold prices
were increasing, that led to further investment in gold, giving impetus to further rise in
gold prices. Rising prices of gold and imports of gold mutually reinforced each other.
Investors seized the opportunity of investing in gold at temporary falls in gold prices.

3.18 Further, it is interesting to take note of the trends in currency with public as ratio to
demand deposits (CP-DD) observed since 2008-09. CP-DD ratio, which showed
declining trend from 1.4 per cent in 2003-04 to 1.1 per cent in 2007-08, began to
increase in 2008-09 and reached 1.5 per cent in 2011-12 (Chart 3.14). It implies that
public’s preference for cash holding increased significantly during these years.
Furthermore, average growth in currency with public was 18.0 per during 2008-09 to
2010-11, significantly higher than 15.4 per cent during 2005-06 to 2007-08. High CP-DD
ratio in recent years might be partly reflecting increase in high value cash transactions
and a part of that perhaps took place for gold purchases in recent years. Gold deals in
the grey market are said to be cash-based. The possibility of large informal transactions
involving huge money in recent years flowing into gold cannot be ruled out, though; this
cannot be verified and authenticated by the Working Group.

Table 3.4: Gold Imports and Current Account Balance

2007- 2008- 2009- 2010- 2011-
Items/Year
08 09 10 11 12
1. Current Account Deficit (US $ billion) -15.7 -27.9 -38.2 -46.0 -78.2
2. Current Account Balance as a Ratio of
-1.3 -2.3 -2.8 -2.7 -4.2
GDP (%)
3. Gold Imports (in $ billion) 16.7 20.7 28.6 40.5 56.2
4. Gold Exports* (in $ billion) 3.0 4.2 4.3 6.1 7.0
5. Gold Imports (Net Value in $ billion: 3-
13.7 16.5 24.3 34.4 49.2
4)
6. Gold Imports as % of GDP 1.3 1.7 2.1 2.4 3.0
7. Net Gold Imports as % of GDP 1.1 1.3 1.8 2.0 2.7
8. Gold Imports as a ratio of CAB 106.4 74.2 74.9 88.0 71.9
9. Net Gold Imports as ratio of CAB 87.3 59.1 63.6 74.8 62.9
*: Imputed Figure consists of 15% of exports of ‘Gems and Jewellery’