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.