India's gold obsession is increasing the wealth gap
Indians, it’s no great secret, have a particularly resistant strain of gold fever. It has been around for millennia. India has no goldmines but from the very dawn of long-distance trading, merchants fell hard for the golden allure, trading away pepper and spices, cloth and knowledge to get it. Kings and queens bought in. Many a violent war was fought over bounties of gold.
Today there is no important ritual in this country where the yellow metal is not required. At weddings, to celebrate the birth of children, or even at the end of life – gold plays a central role. Many festivals require the auspicious purchase of gold as a prayer for prosperity. Both film and folk songs describe India as ‘a golden bird’. The love of gold crosses every boundary: the rich, the poor, the privileged from every caste, class and religious persuasion, fall for its glitter.
On 9 April this year, a team of Indian surgeons operated on a 63-year-old patient with severe abdominal pain and recovered 12 bars of gold from his belly. He had risked his life to get this fortune into India and evade import duties. The metal bars ended up in state coffers and the patient found himself in jail.
This was neither an isolated case nor likely the last of its kind. India has recorded a spike in gold smuggling over the last two years – a re-run of the notorious trade of the 1980s. The current spike was prompted by the trebling of import duty in 2012-13 by the Indian government to 15 per cent in order to curb a rush of imports. This was part of a desperate attempt to rein in the country’s current account deficit (CAD) that had soared to a record high of $88 billion. The CAD is the difference between inflow and outflow of foreign currency and occurs when imports outstrip exports.
Gold imports declined marginally, but almost instantly there was an upsurge in smuggling. In April 2014, just before his government got booted from power, India’s former finance minister Palaniappan Chidambaram revealed that gold smuggling had hit 3,000 kilograms a month, worth a staggering $10 billion. The actual figure could be much higher. People – like our unlucky patient – deploy innovative methods to get the metal in. Sometimes dates are stuffed with it, the gold having being melted into the form of their pits. Or it is ground into granules and mixed with other metals to look like ore, or converted into gold belt buckles and flashlight batteries.
According to both the government and the country’s Reserve Bank, gold has become India’s biggest economic nightmare. Yet they remain paralysed when it comes to effective policy prescriptions to dampen down the voracious gold appetite. Today India is the world’s second-largest importer of gold after China. Nearly 20 per cent of global supply annually crosses the border, draining precious dollar reserves. The result is not only a big balance of payments problem but massive amounts of savings that are frozen out of the productive economy.
The import figures are mind-boggling: rising from 700 metric tons in 2010 to a whopping 975 in 2013, despite fiscal measures to curb the trade. Add to this the tons of gold Indian families have been hoarding down the ages. And that’s not the end of it. Gold exchange-traded funds on the country’s two stock exchanges continue to register a high turnover.
In the decade 2001-11, gold’s share of India’s total import bill jumped from 8.1 to 9.6 per cent, just behind oil products. According to a recent Indian Chamber of Commerce study – ‘India’s Gold Rush: Its Impact and Sustainability’ – the value of gold imports through the years of slowdown (2005-12) was higher than total expenditure on urban development, health, education, housing and family welfare taken together.
Put differently, the dollars sunk into gold could have helped educate, house and feed India’s massive population of poor people. Public policy remains ambivalent. On the one hand there are the fiscal curbs; on the other, India writes off roughly $9 to $11 billion annually on gold import duty concessions. Who benefits from these tax sops? And who loses?
The widening divide
Many economists say gold imports are one indicator of India’s growing inequality. The last few years have seen a dramatic contrast in the way two Indias – the urban and the rural – have used gold. One India buys the stuff by the ton in order to park its surplus kitty, while the other liquidates its small stash to raise cash and pay for farming costs and other exigencies of life. The rich India ruins the Current Account Deficit; the poor India in turn gets wrecked by it. Imports get dearer. The rupee devalues and dollar appreciates. The rich get richer while the poor slide further into poverty. But ultimately who’s feeding this gold frenzy?
The World Gold Council estimates 75 per cent of gold demand in India this past decade came from jewellery – purchased largely by the small percentage of Indians that make up the neo-rich. According to the Council, weddings generate half of the annual demand for gold. A large chunk of this goes into that persistent social evil: the dowry. Over the next decade, with more than half the population under 25, there are likely to be 15 million weddings in India each year. India’s appetite for gold simply defies market conditions: demand continues to grow despite a 400-per-cent rise in the rupee price in the last decade.
The dollars sunk into gold have helped educate, house and feed India's massive population.
The other major reason many Indians invest in gold is that a majority are still too poor to be even recognized by banks. Over half of the country’s 1.25 billion people have no accounts at all. This blocks them from formal avenues of finance or secure savings facilities. Many put their trust in gold for providing portability and long-term security. Or so they believe. The poor put their small savings in gold despite its price volatility. When in dire need, they are forced to liquidate this gold at well below market prices through local usurers or jewellers.
Take the case of Swapnil Shirke, a 24-year-old farmer from India’s crisis-hit cotton-growing belt of Vidarbha, who could not get out of the vicious debt cycle so many rural households get stuck in. The more he tilled, the deeper he sank into debt. On 23 November 2012, during a month of festivities throughout India, Swapnil had simply had enough. In desperation he raised a little money by selling his mother Ashabai’s 25-gram gold mangalsutra – a traditional gold chain worn by married women. With this he managed to pay the wages of his farm workers, keeping aside a part for his younger brother’s college fee. Then he hanged himself.
During that same festive November when Swapnil died, upwardly mobile Indians spent several million dollars on 50 tons of gold, mostly jewellery. The irony could not be starker. The gold chain Shirke sold was for his mother the last remaining memory of his late father. It was also the family’s last asset.