Gold is Freely Importable





The removal of the 80:20 rule comes with the implicit admission that government regulation is powerless to modify gold consumption patterns. Last week, the government removed all restrictions on the import of gold.

Along with this, government officials were quoted in news stories saying that the removal of curbs would do away with distortions in gold import. As things stood before the relaxation, final gold consumption in India was said to be at around the same level it was before the restrictions began. Even though the curbs helped control the apparent current account deficit, it had no impact at all on the ultimate source of the gold problem, which is the actual gold consumption. All it appeared to have done was to create problems for gold exporters.

The lesson of this last one year has been that the gold habit of the Indian consumer is intact. Any measures that the government takes will not make people buy less gold.

Beyond a point, the government can end up damaging the jewellery export business and reducing the custom duties it collects on gold imports but that's about it. Of course, it's possible -as some anecdotal evidence suggests -that among people who do buy gold, the per capita consumption is going down. The new urban Indian doesn't buy as much gold as her mother and grandmother used to buy. However, with spreading prosperity, the gold-buying population is likely to be expanding so aggregate consumption is increasing on an economy wide scale.

Anyway , I don't think we'll see more official attempts to modify the great Indian gold buying urge, at least for a few years. A certain amount of gold is going to be brought into the country for consumption every year. The government has a choice of whether to let it happen legally and collect custom duty and other taxes on it, or whether to add to the profits of the criminal gangs who smuggle gold. Either way , people who want gold are going to get their hands on it.

Of course, the government can try and wean people away from gold. At the height of the mid-2013 current account deficit (CAD) crisis, the then finance minister appealed to people to buy less gold. It's easy to make fun of such appeals but the fact is that while it would have been just as useless -some new rule or regulation -it wouldn't have any negative side-effect.

Can anything reduce this Indian consumption of gold?

I think it can (be reduced), but only after some years of sustained poor returns from gold. Gold belongs to a class of investments that will never produce anything, but whose growing value depends entirely on the belief that someone else will pay more for it eventually . For a good part of the last decade, gold prices went up sharply and convinced investors that gold was a great investment. This probably gave a big push to gold purchases in India. In any case, the behaviour of Indian gold consumers seems immune to the normal law of price and demand or investor behaviour.

Basically, people believe very strongly that the price of gold will go on rising sharply and that any fall is temporary and a precursor to a buying opportunity. Unfortunately, for them, there are strong signs that this is not true. The shape and nature of the entire gold price cycle makes it clear that it is a side effect of the huge liquidity glut over the last few years.