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India’s love affair with gold has been since ages. It is an integral part of our culture and a sign of luxury. Roughly 700 tonnes or about 33% of the total gold mined in the world is consumed in India. That makes India the largest importer of gold. If such large quantities of food items were imported, it is quite understandable; it would feed people. But what is the use of gold? Wealth is preserved when the value of investments grow at a rate more than the inflation rate. Gold precisely has done that consistently for ages. Hence Indians find gold to be a safe and simple investment avenue to beat inflation. The other alternatives like real estate and equities are out of reach or complicated for an average Indian and so they keep accumulating gold. After all, gold is wearable wealth too.

So what is the fuss about it? Though the universal acceptance, liquidity and safe haven against economic or political turmoil make gold lucrative, it does not add much of a value to the economy. The first major problem the Indian economy faces with this high gold consumption rates is the increasing current account deficit (CAD). India has to pay for its gold imports using its foreign exchange reserves. Now because of its unproductive nature, Gold doesn’t even add to industrial production, unlike other metals which do. High gold imports and a weak rupee have been the biggest stress points when it comes to narrowing the current account deficit.

Misallocated capital is the second problem faced by the Indian economy due to its gold rush. Keeping the consumption aside, physical gold (mostly jewellery) is also considered as an investment among Indians. However, it is an investment that does not add much value to the productive capacity of the economy. Investments in the physical form of gold are either stored in bank lockers or get exchanged for making jewellery. It seldom gets traded for money. What if this amount was invested in the capital markets? It could be used by companies to raise securities and further increase their funds and production which would add to the economy on a massive scale.

Isn’t just the thought of those extra bites of wealth an incentive to end this love affair of ours with gold?


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