Equities need some love in gold infatuated India

Gold does get inflation-beating returns but not as much as equities

Gold has historically been a favoured asset class for Indians, but the demand for a new policy that will reset investor priority to equities—a more productive asset class than the precious metal—is becoming louder. Mint takes a look at what drives the demand for gold.

Does preference for gold hurt economy?

According to banker Uday Kotak, who in a series of tweets on Monday highlighted peoples’ preference for gold investments, the net value of gold and precious stone imports between 2011 and 2019 stood at 24,500 crore, while the net inflows from FPIs in debt and equity totaled $145 billion during the period. This, Kotak says, amounts to a net export of $100 billion in domestic savings into gold and jewellery, while foreign savers bought into top companies in India—not a very desirable trade. Unlike domestic savings that go into equities, FPI inflows are believed to introduce volatility in the market.

How heavy does gold weigh on trade deficit?

India mines gold from Jharkhand and Karnataka, but the bulk of the requirement is imported. In April-June, India imported gems and jewellery worth $18.6 billion, about 68% of the trade deficit of over $27 billion. The country exhausts valuable foreign exchange in importing the metal. The other big contributor to the trade deficit was crude oil, which explains the Centre’s EV push. The preference for gold over investing in financial instruments also comes in the way of expansion of the capital and bond markets. Policymakers prefer to channel domestic savings into financial instruments as they are more transparent.

Does the yellow metal fetch good returns?

Gold does get inflation-beating returns but not as much as equities. It also gained from the black money it attracted in olden times. Its physical nature aided Indians in hoarding it.

(Paras Jain/Mint)

Why are Indians still obsessed with gold?

According to Biswajit Dhar, an expert in international trade and professor of economics at Jawaharlal Nehru University, the middle class’ attraction for gold is primarily due to a lack of other investment options. Risk aversion holds them back from getting into the capital markets, while realty, earlier an option, is going through a prolonged slowdown. “What is left is fixed deposit, which is becoming less lucrative due to easing interest rates, leaving gold as the only instrument to park their savings," says Dhar.

How will more equity investments help?

At a time India is going through a decline in private investments, more savings flowing into equities and better sentiments in the market will help companies raise resources and deploy them in new projects. Firms are facing a fund crunch because banks, which are grappling with toxic assets, are being conservative in sanctioning new projects. Also, the high interest rate offered on small savings schemes discourage domestic savings from reaching banks, something that businesses say add to their high cost of funds.

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