Tuesday, February 21, 2012

War on Gold: India’s Government Mulls Restraint on Gold Imports

The proverbial shot across the bow against gold holdings by India’s citizenry, has been fired by the Indian government.

Reports the Mineweb.com,

India's top policy advisory body, the Prime Minister's Economic Advisory Council headed by C Rangarajan, has urged government to discourage gold imports into the country and rather channel savings into formal financial instruments.

The Council made the recommendation in its review of the economy that the government discourage gold purchases and instead provide incentives for investment in financial assets because gold accentuates the current account deficit and hence, import of the yellow metal is unsustainable…

Massive gold imports have rung alarm bells with Indian economists, investment bankers and analysts stating that India's fascination with gold could be a reason why growth appears to be flagging. The gold import bill is expected to touch $100 billion by 2015-16, industry body Assocham (Associated Chambers of Commerce and Industry) has said. "Calculated on the basis of CAGR of period 2010-11 over 1999-2000, the gold import bill could total $100 billion soon. At these levels, gold imports are a huge burden on the balance of payments and accentuates the current account deficit," said Assocham secretary general D S Rawat.

What in reality has been unsustainable isn’t the average Indian’s fixation with gold, but rather the government’s insatiable spending habits.

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chart from tradingeconomics.com

India’s fiscal balance has deteriorated sharply since 2008.

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chart from tradingeconomics.com

And growing consumption activities, substantially out of government spending, has been reflected on the India’s trade and current account balance through ballooning deficits.

Besides, expansion in government activities essentially crowds out the private sector. This essentially reduces productive opportunities.

The great Murray N. Rothbard explains that fiscal deficits,

whichever way you look at them, cause grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden…to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits

Yet the political agents abetted by mainstream experts wants the average Indians to shift their savings to financial assets which in reality are meant to finance more of government’s profligacy.

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from tradingeconomics.com

The Indian government has last year embarked on monetary tightening policies where interest rates had been raised 13 times…

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from tradingeconomics.com

…this has has led to a temporary drop in consumer price inflation, but whose long term trend remains up…

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…and the tightening has likewise prompted for a decline in her stock market.

However, whatever discipline India’s government wanted to demonstrate appears to have been fleeting. India’s government recently announced the reversal of tightening policies, which has been instrumental to the vigorous rally of India’s stock market.

At the end of the day, a stirring revelation can be gleaned from gold prices based on India’s rupee over the long term

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chart from goldprice.org

Aside from the cultural and traditional affinity with gold, the average Indians appears to have been hedging against government’s inflationism.

The rupee’s purchasing power against gold has fallen off the cliff, or seen conversely, gold prices in rupee terms have skyrocketed!

As the distinguished Henry Hazlitt wrote,

The next inflation hedge we have to consider is the purchase of gold. This seems to many the best hedge of all. They remember that in the great German inflation those Germans who consistently bought gold whenever and to the extent they could, and held it until the inflation ended, came out with at least their principal intact. From a strictly economic point of view, buying gold in a major inflation and holding it probably presents the least risk of capital loss of any investment or speculation.

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