Winning back the aam investor

Budget must address a middle class hurt by unfair practices of financial services institutions

The forthcoming Union budget will be presented against the backdrop of several structural distortions in the economy. One distortion seen over the past two to three years is how large amounts of savings are moving into gold purely as an investment avenue. Gold imports nearly doubled in just one year (2011-12) to $60 billion. This was unprecedented. Gold imports alone were about 3.5 per cent of the GDP. If they hadn't doubled in 2011-12, and had remained in the normal range of $30 to $35 billion, the current account deficit would have been far more benign, around 2.5 per cent of the GDP, rather than 4.2 per cent, which is regarded as very risky.

It is this bulging current account gap that caused the exchange rate to become so volatile in the last quarter of 2011, when it rapidly slipped to Rs 56 to a dollar, raising fears that it would touch Rs 60. The government then began raising the import duty on gold to prevent high gold import. However, that is hardly a solution as gold smuggling is back in fashion. In this financial year, gold imports have not abated significantly and the RBI governor has warned that the current account gap in 2012-13 might be even higher at 5 per cent of the GDP, exacerbated by negative export growth. This is not good news.

There is a reason why small and middle investors are preferring gold as an investment prospect while moving out of other equity-linked financial products, particularly mutual funds and insurance-linked investment instruments where massive savings were being channelled earlier. A large number of middle class investors have found, to their utter dismay, that banks and insurance companies had been consciously mis-selling pension, insurance cum investment products to savers, informally suggesting a certain minimum tax-free return that could be withdrawn within five years or so.

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