Gold: Why is India's influence not worth its weight?

The Hindu Business Line Thursday, Sep 21, 2006

R. VAIDYANATHAN

With India consuming almost a fourth of the world's gold production, it is surprising that it plays but a marginal role in influencing policies pertaining to the precious metal's pricing, output or quality. It is time the country leveraged its position as a major buyer to work for a better deal for the Indian consumer, says R. VAIDYANATHAN.

In spite of being the largest consumer of gold, India plays no major role globally in influencing the metal's pricing, output or quality issues. It has been rather shy in asserting its place in matters pertaining to the precious metal. This could be partly because of the ideas of the policy formulators regarding the role of gold in the domestic setting as an "unproductive investment" and also because of India's general inability to occupy the high table in global affairs, even if that is its natural due. For the last several decades, the country has been the largest purchaser of gold in the global context and more than 90 per cent of this is for conversion to jewellery. Gold has an important investment role in the household sector and also acts as collateral in the non-corporate sector. Its attraction stems from the liquidity of the asset as it can be pledged for a loan 24x7. It is, in that sense, the actual Any-Time-Money (ATM) instrument in India. Transfer of ownership is also very easy, possession often leading to ownership, especially within families as, for instance, when a mother gifts a piece of jewellery to her daughter.

Effective collateral It is also divisible, in the sense that one can acquire even 5 grams of it, unlike, say, real-estate, which is not divisible into smaller units of, say, five square feet. Gold is also portable in jewellery form and that is one of its major attractions. It is the most important insurance product for the housewife, particularly among the poorer segments. Actually, the so-called superstition regarding not removing such gold ornaments as the mangalsutra till the death of the husband acts as an effective economic principle in protecting certain classes of assets for women. Gold also provides collateral for the household in situations of distress. More important, it is normally not disposed of without the consent of the lady of the house. Actually, many men may not even know the exact amount of gold in possession since the housewife may keep changing its form, from bracelets to bangles, or chains to necklaces. No reliable estimates There is no reliable estimate available of the total stock of gold available in the country and the number varies from 9,000 tonnes to 20,000 tonnes. The quantum could be much higher as, other than households, there is a significant quantity available with temples, churches, mutts, and so on. Table 1 shows the annual demand for jewellery in India, which forms nearly one-fourth of the global demand. It is to be observed that a significant portion of the demand in West Asia stems from persons of Indian origin and, considering that, the total Indian demand may be said to be almost one-third of the global demand. Trade channels suggest that nearly half the demand comes from the Southern region, more so from Chennai. It would be interesting for sociologists to study the large demand from Tamil Nadu for the yellow metal, compared to other parts of the country. Is it linked to tradition or any other reason? Even during the period of complete ban on import of gold after the 1960s, and before liberalisation, the demand did not dip and was met mainly by "unofficial channels", including smuggling. `Not productive' The thinking by government-oriented or -inspired economists is that the purchase of gold by households for jewellery is not productive and should, hence, be discouraged. Incidentally, in the statistics available, the purchase of gold for jewellery is categorised as consumption and not investment, though households consider it so.

From that perspective the country's our savings rate would be higher by 2-3 percentage points if gold is included as household savings. Exploiting `buyer power' But any asset, even if classified by the Government and household as investment, can be perceived as consumption and, hence, it can play a large role in the affairs of a society like ours. India should recognise that it is the largest purchaser of this commodity and, like any large purchaser of a commodity, should leverage on its `buyer power'. The largest consumers of coffee or maize, or of steel, aluminium or copper, try to utilise their `buying power' to the maximum. For instance, the dominant position of Wal-Mart arises to a large extent from its ability to use its buyer power. Recently, a report suggested that China wants to leverage its position as a major consumer of many industrial goods. With many European governments unloading their stock in the market, it is clear that gold is no longer being treated as a unit, or measure, of safety or as a hedging instrument. The gold standard has come to an end, especially with the development of the derivative markets. As the largest buyer of this metal in the world, India should play an active role in the international market and leverage its position to shape policies pertaining to the precious metal, including on the unloading of gold by other governments and the production cuts by the mines. The time has come for India to recognise its dominant position in the buyers market of some of these commodities and try to leverage its position in the global arena for a better outcome for the Indian consumer, be it in relation to price, quality or availability. (The author is Professor of Finance and Control, Indian Institute of Management-Bangalore, and can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his organisation.)