Gold Rush Maybe Hampering Indian Growth

05 September 2011 - Which Way to Pay

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Gold Rush Maybe Hampering Indian Growth

In the current financial market, the fascination and demand for gold is globally tangible and with India as a huge gold consumer, we are lying central in the 2011 gold rush. However, is the glitter of gold actually taking a shine of the Indian economy? With the majority of money being locked up in yellow metal and being left to sit idle in bank lockers or jewellery, we are effectively losing circulating capital.

Adheek Barua, chief economist at HDFC Bank said:

"Money spent on gold is mostly wasted because it's only hoarded and simultaneously excluded from the financial inter-mediation system".

According to World Gold Council, India's gold imports rose 60% in April-June 2011 as upon last year. As a result, gold is now the second-biggest Indian import, behind crude, up from fifth place in 2007-08. Gold imports are up nearly half a percentage point of the GDP in the last three years, implying that much more of savings is getting locked up in an unproductive asset.

As investors have poured money into the time-tested hedge against inflation, household savings in India have moved away from productive financial assets, falling to 9.7% of GDP during 2010-11 compared with 12.1% in the previous year.

Indranil Pan, chief economist of Kotak Bank acknowledged a shift from household savings to yellow metal financial assets within the Indian economy. Pan said gold assets will dent growth, however he also said that it’ll be “hard to gauge the magnitude of the loss" with regard to GDP.

A member of the Planning Commission, Pronab Sen, agrees with the argument that high gold imports are not good for the economy. That said, Sen is of the opinion that gold is not central in current economic environment:

"Since investments aren't really taking off at the moment, to talk about this in terms of inadequate savings isn't necessarily true," Sen said. "This shift to gold could become a problem over time as household savings in productive assets fall, but not right away."

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