Why do Indians buy so much gold?

India is the largest buyer of gold in the world. Roughly 700 tonnes or about 33% of the total gold mined in the world is consumed in India. That makes India the largest trader of gold.

The fundamental reasons for buying gold jewellery are rooted in Indian culture especially during weddings. Lot of modification has happened to our traditions but gold purchase on the occasion of wedding has not changed much. Though the newer generation is not too fond of wearing or flaunting gold jewellery, the demand for gold jewellery has not gone down. We end up buying 950 tonnes of gold every year.

Why should the government worry when we are actually saving and creating wealth as we buy gold?

 At the individual level, it seems to be highly beneficial in buying gold but there are serious consequences at the national level.  For us to understand this we need to get into a bit of detailing. The top five producersof gold in the world are China, USA, Australia, South Africa and Russian Federation.  India does not produce much of the gold consumed. That means we need to buy gold from these countries. Gold nearly constitutes 12% of the total imports and comes only next to crude and capital good. This causes problems in forex and you wonder what the problem is. When we import gold we need to pay in foreign exchange and we roughly require USD 60 billion worth of dollars. This directly affects the value of rupee negatively and thus creating further gold prices raises especially petrol and diesel. Another reason why gold may not be great to the economy is its unproductive nature. Gold does nothing but remain idle in safes or bank vaults. Other financial instruments like fixed deposits, investment policies, shares, bonds etc is a great source of productive funds for corporate and government bodies, creating positive impact on the economy. This is making the government skittish. Government wants to discourage import of gold and hence have recently hiked the import duty. We believe this might not create too much impact on the demand as people might absorb the price rise and may even end up assuming to have created wealth. Increase in import duty may encourage smuggling and black economy. If the finance minister openly declares that the import duty will be brought down at a particular date, then the investors may refrain from investing in gold till that period. 

Indian Gold Coin

Prime Minister Narendra Modi has launched three programmes aimed at reducing physical gold demand and attracting tonnes of gold from households into the banking system.

The three schemes that Modi introduced are Gold Monetisation Scheme (GMS), Gold Sovereign Bond Scheme and the Gold Coin and Bullion Scheme. Modi also unveiled the first ever national gold coin minted in India with the national emblem of Ashok Chakra engraved on it.

The Gold Monetisation Scheme will replace the existing Gold Deposit Scheme, 1999. However, deposits outstanding under the Gold DepositScheme will be allowed to run till maturity unless the depositors prematurely withdraw them.

The Gold Monetisation Scheme is aimed at tapping part of an estimated 20,000 tonnes of idle gold worth Rs. 5,40,000 crore in family lockers and temples into the banking system.

The Gold Sovereign Bond will be issued by the Reserve Bank of India (RBI) on behalf of the government with an interest rate of 2.75%. The bonds will be sold through banks and designated post offices.

Describing the schemes as “sone pe suhaga” (icing on the cake), Modi said gold has often been a source of women’s empowerment in the Indian society, and these schemes will underscore that sense of empowerment.

“Women in India usually don’t own house or a car in their name, but gold is a matter of their strength. India has 20,000 tonnes of idle gold. It is an important aspect of women empowerment,” Modi said while speaking at the launch, “people should take advantage of the golden opportunity to help India march to a golden period.”

The Prime Minister said there is no reason for a country with so much gold lying idle to remain poor. With some efforts and right policies India can get rid of this tag (of a poor nation), he said. Recalling India's tradition of saving and culture of empowering women with gold, he said in a lighter vein that even the Reserve Bank of India Governor Raghuram Rajan will have to recognise the difference between "arthashastra (economics) and grahshastra (home economics)".