Band aid on gold

Government must ask why demand for gold is rising, widen access to financial system and other assets

The government is trying to curb the demand for gold by raising import duties and asking banks not to sell gold to customers. This would pave the way for unofficial gold imports and a black market, creating more difficulties in the system. The question to ask is, why is the demand for gold rising, despite the reduced rates of income and consumption in the economy.

There are two important factors in this phenomenon, and neither lends itself to a short-term solution of the kind the government is searching for. The first is that poorer households are buying gold for their new savings as they are unbanked and do not have access to other financial assets. A poor householder who gets some income from NREGA or any other government scheme that he did not have earlier is bound to keep some part of the income as savings. This would happen even if the level of savings per poor household were very small. At the national level, if a small element of the government's spending on transfer payments to the poor is to be saved, as any household would do, then in the present system, has the government thought about where it would put the savings? While there has been discussion about how banks would disburse cash to the poor, it is rather unimaginative to think that every single penny would be consumed. For a poor household, it is worth saving even a tiny amount to provide for future plans or emergencies. Access to the financial system and other assets is limited, and gold turns out to be the only available asset.

The second element of the story is inflation. Richer or middle class households want to earn a positive real return on their savings. Does a bank deposit or a national saving certificate, or a PPF account paying 9-10 per cent interest when inflation is at 8-9 per cent, appear attractive to most? Does putting money in an non-banking financial corporations, plagued by scandals, appear safe? Does real estate, whose prices have reduced in many parts of the country, look like a good investment? Similarly, in times of uncertainty, the stock markets may not seem to be an attractive investment. If there are no desirable options, people will find a way to buy gold, regardless of the higher duty or the advice to banks.

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