• Aug. 23, 2017, 2:17 pm

Unbanked in India flocking to gold, driving up price

gold“There’s gold in them thar hills!” was a phrase often uttered during the gold rush of the mid 1800’s, at least in the versions told on Saturday morning cartoons.

Some guy who had been up in said hills too long would burst through the swinging doors of the town saloon, utter that phrase and before you knew it the bar would be empty save for several puffs of smoke where prospectors used to sit.  The gold rush was on and it drew people from all over these parts and those parts in hopes of striking it big.

There is a gold rush in India as we head into 2014 but it looks completely different from 1850’s California.  While California’s was driven by novelty, availability and potential, India’s is fueled by tradition, scarcity and predictability.  A contradictory blend of forces including weak currency, lack of investment options, more disposable income and historical familiarity with the metal have driven many in the country to use gold and not banks as their primary investment vehicle.

Gold has long played an important role in Indian culture.

“Since earliest antiquity (at least 3,000 BC), gold has served as the fungible commodity of first and last resort by the wealthiest of elites, the most destitute of poor, and everyone in between on the Indian subcontinent,” said Dr. Jamsheed Choksy, Chair of the Department of Central Eurasian Studies at Indiana University.

“Reasons include its relatively high value to mass ratio, its limited supply, the ease of its transport and storage as ingots, coins, and jewelry, and the ability to relocate with it–even flee with it surreptitiously in trying times–on one’s person.”

This convenience led to gold’s growing significance in Indian culture.  For most people gold was much more attainable than land, which also came with the risk of being taken over by others and leaving the holder with nothing.

Paper money was controlled by the government while stocks and bonds depended on collective action.  Gold became the traditional gift at weddings and other community celebrations where people wanted to wish prosperity for the recipient.  It serves that same role today.

Yet for all its significance in Indian culture, domestic gold is a rarity.  Much of the easily mined gold was extracted by British companies and exported beginning in the mid-1800’s, leaving local mining companies with declining reserves that became more expensive to produce.  In 2012, India produced only 2.8 tonnes of gold while importing more than 900 tonnes to meet demand.

The tab was $56 billion.  While gold increased in value by 6% worldwide in 2012, prices in India soared 13%.  As more gold gets imported to meet demand, Indians are incurring more debt to get it.  Gold is now a leading contributor to India’s fiscal deficit.  In 2011, it accounted for less than three percent of GDP.  In 2012’s third quarter that percentage grew to a record 5.4 percent.

The Indian government has taken notice.  The Finance Ministry raised the import duty on gold from four percent to first six percent and now ten in the hopes that will dissuade citizens from buying at their current volume. They have also tied imports for domestic consumption to export levels.  Imports could drop by as much as half in 2014.

Imports may be cut but demand will not.  Some believe these actions will only drive up price, for as long as interest levels on most bank products stay low, people will look to other options.

“In the last five to seven years many Indian people actually have discretionary income and savings capacity,” said a senior official from an organization which closely monitors India’s economy.  “They are looking for instruments that can generate income.”  Others will smuggle it into the country or resort to other methods.

Low rates are one of many reasons why more than half of India’s 1.2 billion citizens do not use banks. Geography is another. Many people live in rural and remote communities.

In a Monetary Policy Statement from 2010, the Reserve Bank of India noted there were 74,414 entire villages with populations of at least 2,000 that were completely unbanked.  While mobile technology makes banking easier for those living remotely who wish to use banks, it is not a cure for everything turning people away from banks.

Institutional distrust is another reason people do not use banks.

“Banking costs, inconvenience, fears of having one’s assets controlled by others, limited access and worries about loss in a downturn are some major reasons,” explained Dr. Choksy.

The senior official concurred.

“Banks can be intimidating for a first time entrant, and officials can be disrespectful of new entrants who are unfamiliar with the system.”  The official contrasted that with the neighborhood jeweler, who fills many of the bank’s roles.  “The jewelers are established presence in many communities, and there is a high trust factor.  They are similar to the old community savings and loan model in the U.S. where customer accountability was a strong factor.”

Greed provides another reason for some people to heavily rely on gold.  “In modern times, stashing and transferring assets such as gold also serves as a means of tax evasion,” added Dr. Choksy.  “Petty evasion of income and wealth taxes is yet another reason why some sectors of the population do not use banks or only do so partially.”

More than 600 million unbanked people means banks have much less money to lend out to individuals and small businesses who could play a vital role in the country’s economic prosperity. Inflation is at 11 percent and the rupee recently fell faster against the dollar than 77 other internationally traded currencies.

This is killing businesses who have to import all sorts of goods and resources such as coal which is increasingly being brought in to fuel plants, the senior official said.

“This also happened at a time when India stopped exporting iron ore which cost them valuable revenue.”

Business is also being hindered by poor infrastructure such as roads and bridges that turn a 35-mile drive to port into an up to eight hour adventure due to poor quality routes and lack of highways.  Those industries that are able to produce exports have a hard time getting their wares to the international market.  Pricey real estate, bloated state-owned  enterprises and a bad jobs market make India a tough place to conduct business in at a time when Western manufacturers are looking away from China and to other countries in the region to move their operations to.

There are reasons for optimism in India’s manufacturing sector.  “Imports are dropping, so local businesses are faring much better, which has caused the trade deficit to narrow,” the senior official said.  “There are good supply chains for automobiles and many other goods.”

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