India, a net importer of Gold faces trouble paying for its import bills every year. Gold is the second largest imported commodity (by value) after Crude Oil. Most of the imported gold find their way no other than bank lockers and vaults by the household.
We can say that culture plays an important role in investment actions of a person. But, lately it has raised tremendous issues which are weighing the economy down (or not letting it grow up to its potential). To ease the understanding about how stocks of gold has been a spoilsport for India’s bright future, I am putting my view point wise.
- The large proportion of gold which do not take part in any economic activity and are kept lying in lockers become Idle assets for the economy.
- These idle assets are inaccessible to financial system. Usually, when gold loans are taken: Loans are provided at certain LTV i.e. Loan-To-Value which is around >~75%-85% by NBFCs. (For Rs. 1000 worth Gold, Loan is granted unto Rs. 750 (if 75% is LTV).
- When gold is not involved in financial system, it brings a multi-fold effect with it by the virtue of Money Creation by banking system. And this is not it! by multifold, I seriously mean multifold because if your money multiplier is ~6 (for India at present). For every ₹ lost as opportunity cost there is an effect of 6 times i.e ₹ 6. Now, imagine the stock of idle gold and you can imagine.
- That’ not it, I have just talked about opportunity cost. Worse is yet to come. Every year, to fund the Balance of Trade (BoT), India has been net borrower from international markets to fund the deficit. So, to fund the bills for assets which merely contribute something for a long period of time to the economy. India is taking up debt or selling its assets to fund it.
- Recently, Indian PSU Banks are to be re-capitalised with ₹ 2.4 lakh crore could have been a much lighter sum had gold been monetised properly.
Having given you a brief on how idle gold is weighing down on the economic development of the country. I will sum up with the idea that Gold Monetisation Schemes brought up by government are still not very attractive to get much of the idle gold out of household’s vaults. But, we as responsible citizens and prudent investors need to understand that physical gold is not the only route to invest in that commodity. I will focus on alternatives to investment in physical gold at a later post.
Till then, Take care and stay tuned with my blog!