Over April, May and June 2013, Indians would have bought 300-400 tonnes of gold.
Why do gold imports get counted in the current account and not the capital account in a country’s balance of payment (BoP) accounts? The origin of the question stems from the unfairness of the wholesale blame that Indian household gets for soaking up a quarter of the yearly world demand for gold that costs an outflow of billions of dollars from India. I hold the view that the Indian household makes a sensible decision to hoard gold. It is sensible because access to financial assets remains difficult and where access is easy, the regulatory failure to stop large-scale cheating of retail investors, as in the unit-linked insurance products that cost us 1.5 trillion in lost money, has broken the fledgling faith in markets for the average investor. Regulatory and institutional failure is the reason people hoard gold and not because they are stupid. And as the country looks more and more unstable, we buy more and more gold—perfectly logical and rational. This is no different than industrialists moving their business overseas and the rich buying real estate and stock abroad. Since the average household can’t do that, it buys gold. Over April, May and June 2013, Indians would have bought 300-400 tonnes of gold, a jump of 200% over the same period last year. Retail investor issues rarely wrinkle the brow of policymakers, why then this uproar over the average Indian’s fetish for gold? It worries people who get worried over the country’s finances because paying for this gold causes our BoP to get unbalanced.