Indian Economy - News & Discussion 27 May 2012

prahaar · Post by **prahaar** » 05 Mar 2013 13:32

amit wrote:
RoyG wrote:Households buying gold and the global economy are the reasons for our poor economic state onlee . This guy thinks that by cutting gold purchases for one year he will pay half of the current account deficit. Problem is our spending keeps increasing every year so it won't do sh*t to fix our growing debt. In the face of depreciating currencies gold prices are appreciating and central banks are accumulating. Why would you penalize gold? Bravo Congress.
Boss, I wonder if you know what you're talking about. You've been one of the advocates of "import more gold" on this forum. Do you have any idea how much in percentage gold imports account for our import bill every year? The figure is easily available and in fact I've posted it before more than once. Have a look at it and then see if Chidambaram is talking sense or not. Of course it would not be possible to stop imports for one whole year but gold import is a problem and it's a horrid investment option for ordinary middle class salary earners.

Give me a safer option than Gold for a dumb middle-class DOO like me. The govt has failed to create a safe and transparent investment avenues to Aam-Aadmi like me and hi-fi scholars lecture why gold-investment is a crime. If people have the right to drive 500CC bikes and 2000CC SUVs then the FM should not bother dumb Indians like me who do not understand financial instruments.

Gus · Post by **Gus** » 05 Mar 2013 13:52

buying gold is a result of bad governance and economy. treating symptoms is not treating illness. If this is what passes for "finance minister"...then no wonder we are in deep doodoo...

amit · Post by **amit** » 05 Mar 2013 15:02

prahaar wrote:Give me a safer option than Gold for a dumb middle-class DOO like me. The govt has failed to create a safe and transparent investment avenues to Aam-Aadmi like me and hi-fi scholars lecture why gold-investment is a crime. If people have the right to drive 500CC bikes and 2000CC SUVs then the FM should not bother dumb Indians like me who do not understand financial instruments.

Instead of giving me rhetoric why don't you explain to me why you think investing in gold gives you a safer option as a "dumb middle-class DOO"? Maybe I'm missing something here.

For example suppose you buy say 10 grams of gold jewellery of 21 carats (if you are thinking of buying 24 carat gold biscuits then, sorry boss, you're not a middle-class DOO) today. How much gain do you think you'd make from whatever XXX amount in rupees you pay for the jewellery in say, 5 years or 10 years? Mind you keep inflation and the depreciating nature of the rupee in mind when calculating.

Look boss two wrongs don't make one right. You may think that the govt has failed to create a safe and transparent investment avenue for you. You may (or may not be) right. However, that doesn't make gold a safe bet. Also if you invest in gold and lose out (which you will for sure, even a cumulative FD at 8 per cent interest rate will give you a better rate of return) you get hurt not the government.

PS: I'm asking a simple question. I'm yet to get a definitive response. I repeat: What do you guys think the government can do to give a "safer" investment option and what exactly are these options?

Instead of political innuendoes (as Suraj said in an earlier post, we should keep try to keep politics out of this thread) I'd like to hear a rational response based on economic principles. I'm sure I'd learn something new.

amit · Post by **amit** » 05 Mar 2013 15:05

Gus wrote:buying gold is a result of bad governance and economy.

Buying gold is due to the undue importance the yellow metal has in our society. Buying gold is also due to bad investment decisions taken with the mistaken idea that gold is a safe haven investment.

It is only a safe haven investment if you buy in sufficient quantity and if you buy 24 carat gold which suffers no depreciation when you sell it. Gold is a safe investment when you dabble in futures.

Can you tell me how a normal middle class am aadmi in India can buy sufficient quantity of 24 carat gold? Or how he can dabble in gold trading?

Gus · Post by **Gus** » 05 Mar 2013 18:11

the normal aam aadmi does not know and does not care about these things. gold is safe. buy it. thats all.

RoyG · Post by **RoyG** » 05 Mar 2013 18:49

amit wrote:
RoyG wrote:Households buying gold and the global economy are the reasons for our poor economic state onlee . This guy thinks that by cutting gold purchases for one year he will pay half of the current account deficit. Problem is our spending keeps increasing every year so it won't do sh*t to fix our growing debt. In the face of depreciating currencies gold prices are appreciating and central banks are accumulating. Why would you penalize gold? Bravo Congress.
Boss, I wonder if you know what you're talking about. You've been one of the advocates of "import more gold" on this forum. Do you have any idea how much in percentage gold imports account for our import bill every year? The figure is easily available and in fact I've posted it before more than once. Have a look at it and then see if Chidambaram is talking sense or not. Of course it would not be possible to stop imports for one whole year but gold import is a problem and it's a horrid investment option for ordinary middle class salary earners.

Ha! It goes both ways. As opposed to an advocate of "junk the currency" on this forum? I assume so considering you'd rather penalize the average Indian by limiting his choices rather than ridiculing the government for fiscal irresponsibility. Unfortunately, you like some others on this forum attack the symptom rather than the problem.

Oh by the way, I hope you do understand that China, for example, is run by capitalists whose spending makes Indian leaders look like misers. Yet, I'm sure you've seen comparisons between the growth rate trajectories of the two countries.

Yes the "growth rate" is much higher. Is it sustainable? No. They will be slowing down. They are sitting on tons of dollars which is depreciating in value due to US public spending and borrowing. What are they doing now? They are buying gold as a hedge against this currency depreciation. All major central banks around the world are hording gold just like our households b/c they see its value. So much for "economic principles." I hope you understand.

RoyG · Post by **RoyG** » 05 Mar 2013 18:56

amit wrote:
Gus wrote:buying gold is a result of bad governance and economy.
Buying gold is due to the undue importance the yellow metal has in our society. Buying gold is also due to bad investment decisions taken with the mistaken idea that gold is a safe haven investment.

It is only a safe haven investment if you buy in sufficient quantity and if you buy 24 carat gold which suffers no depreciation when you sell it. Gold is a safe investment when you dabble in futures.

Can you tell me how a normal middle class am aadmi in India can buy sufficient quantity of 24 carat gold? Or how he can dabble in gold trading?

What are you talking about? Even lesser carats haven't suffered depreciation. You will obviously not get as great a return but it has appreciated in value.

RoyG · Post by **RoyG** » 05 Mar 2013 19:02

amit wrote:
Gus wrote:buying gold is a result of bad governance and economy.
Buying gold is due to the undue importance the yellow metal has in our society. Buying gold is also due to bad investment decisions taken with the mistaken idea that gold is a safe haven investment.

It is only a safe haven investment if you buy in sufficient quantity and if you buy 24 carat gold which suffers no depreciation when you sell it. Gold is a safe investment when you dabble in futures.

Can you tell me how a normal middle class am aadmi in India can buy sufficient quantity of 24 carat gold? Or how he can dabble in gold trading?

Who are you to decide what is valuable and what isn't? People have money and they spend it according to their wants and needs. If the savings rate is high and they decide it's a worthwhile investment and they properly budget, what's the harm? It's been appreciating in value due to currency depreciation and they recognize that it preserves the purchasing power.

Gus · Post by **Gus** » 05 Mar 2013 19:36

TATA just slashes 50K on its cars. Imagine all the idiots who just bought it a month ago. Sure a car is not an investment, but things like this are what makes people think 'golds never going down and even if it does a little, it will always go up because it is limited' and buy it.

Note that personally, I do not buy gold, don't wear it other than a small wedding ring. SHQ buys it now and then as jewelry for daughter and I cannot fight that losing battle, so I let it be. I do understand that it is not good for the economy in a big picture way.

But I do get annoyed when people who can do literally THOUSAND other things to improve the economy, CHOOSE not to do that, and come and pick on middle class buying gold.

Theo_Fidel · Post by **Theo_Fidel** » 05 Mar 2013 19:49

Gold is heavily marketed because all kinds of middle men can play their games with folks. The politicians don't mind because they control all the channels. Everyone knows what the face value of a CD is and their is less scope for middlemen.No one is even certain what the purity of their earring is and yet it is considered more secure. Only marketing can do this. The fact that CD's at 9.5% interest are less attractive says it all. These are the best rates in the world folks.

That said it is a social problem that is hard to change. I can guarantee one thing, buying gold is a sure way to stay poor. No one ever got rich buying gold, other than trader types. The rich never spend more that a tiny fraction of their income on gold. It is the poor and middle class who get taken to the cleaners.

RamaY · Post by **RamaY** » 05 Mar 2013 20:18

^ what makes people rich, saving more money or spending on non-gold items or investing in stocks???

Let us assume Gold is useless and has no value outside mental masturbation. What value a TV provide or an A/C and such luxury items? Isn't gold the most Eco-friendly mental masturbation product?

Secondly if gold is useless why banks use gold as a guarantee for cash loans where as Automobiles or Consumer electronics are not allowed?

First let the Govt and economy become more efficient with the capital they have before crying on Gold buying habit of Bharatiyas.

vera_k · Post by **vera_k** » 05 Mar 2013 20:32

Theo_Fidel wrote:The fact that CD's at 9.5% interest are less attractive says it all. These are the best rates in the world folks.

They are not high enough, given CPI inflation is running at 10%+.

Investors Fleeing Bonds, Savings Spur Record Flows Into Gold

The yield on the nation’s 10-year notes is 76 basis points below the rate of inflation, compared with 14 basis points in South Korea. Indonesia’s bonds yield 179 basis points more than the rate of consumer-price increases.

RamaY · Post by **RamaY** » 05 Mar 2013 20:39

Amit/Theo

Why are you guys so worried about the individual freedom in investing options. If people think Gold is a safe option to invest, so be it and let them reap the benefits.

Can you show a safer investment methods? Govt Bonds, Stock Market, Consumer goods, Land; what is a better investment option than gold? why?

Isn't Fixed Deposits the worst saving option at this point given the inflation? One hardly gets 8-9% interest rate where as the inflation hovers around 10% (There is much life outside CPI).

What is your heart burn against gold and especially using it as ornaments? Is it because it symbolizes Hindu culture?

Theo_Fidel · Post by **Theo_Fidel** » 05 Mar 2013 21:37

Vera_k,

There is nothing wrong in buying gold bonds. In fact I highly recommend it based on your savings profile. I wish all of Indias gold were converted into bonds. It makes me feel good that gold bonds are in high demand. I wish all Indians bought gold bonds to their hearts content.

It is the spurious buying of gold from the local Thanga Malligai that causes the big problems in India. Take one fact, as soon as you walk out the store with that piece of gold its value drops 15% straight as that is the repurchase mark down. If the gold is in the form of jewelry that is worn regular then it becomes subject to continuous attrition. Pieces get lost, the gold wears out over time due to abrasion and scratches. Not only that once bought the money disappears from the economy. The velocity of money at that point is essentially zero. It is a crippling black hole within our system.

All of this would be immaterial if we created our own gold, we do not. So every gram is imported and someone else benefits with minimal benefit to our local economy. Even this is not a problem if we were not spending $60 Billion a year importing this stuff. Think about it for a second. That is more than we spend on housing construction. We spend more on gold than putting a roof over our heads, the results are there for all to see.

RamaY,

I see you have not been to a Christian wedding recently. At one recently the mother-in-law proudly boasted to me that the DIL was bringing 120 sovereigns of gold with her. The darn thing was strangling the poor child like a mill stone.

Gus · Post by **Gus** » 05 Mar 2013 22:21

Does everything need to have a EJ angle? This is beyond ridiculous.

RamaY · Post by **RamaY** » 05 Mar 2013 22:34

This whole

about people buying Gold itself is nonsensical and idiotic.

People buy whatever they want. One can argue that the value of luxury cars also goes down by 20% as soon as they are out of showroom doors.

Similarly one can argue that the $'00B spent on high-end consumer products and even Oil imports are of no use. They will become worthless in 3-10 years depending on consumer/engineering product. Why should we?

What does India export? S/W services, Polished diamonds, Jewelry; all these are equally ridiculous goods for the consumers.

Theo - The Christians/Muslims buying gold ornaments in India is a Hindu thing. Chinese/Western Muslims/Christians do not do that. They waste their money on even more ridiculous wedding gowns (which they never wear again and worse they often get divorce in 5 years).

Gus - People

on Hindu-inspired Indian centric consumer patterns are secularists (Christians) and Psecs (Muslim dhimmis).

RoyG · Post by **RoyG** » 05 Mar 2013 22:34

Theo_Fidel wrote:Gold is heavily marketed because all kinds of middle men can play their games with folks. The politicians don't mind because they control all the channels. Everyone knows what the face value of a CD is and their is less scope for middlemen.No one is even certain what the purity of their earring is and yet it is considered more secure. Only marketing can do this. The fact that CD's at 9.5% interest are less attractive says it all. These are the best rates in the world folks.

That said it is a social problem that is hard to change. I can guarantee one thing, buying gold is a sure way to stay poor. No one ever got rich buying gold, other than trader types. The rich never spend more that a tiny fraction of their income on gold. It is the poor and middle class who get taken to the cleaners.

Right right. I ask again. Why are central banks hording the stuff? Tradition?

Suraj · Post by **Suraj** » 05 Mar 2013 22:36

The effect of the gold imports is related ultimately to GoI's mismanagement. People aren't just buying gold as an investment. They flock to it when they feel the value of their paper money is being eroded. A comparatively high inflation regime today compared to say, 2003-2008, acts upon their impulse. It also presents a vicious cycle because the same inflation also erodes the value of the rupee against external currencies, making imports dearer.

Chidambaram is unlikely to find any traction with his comments unless he makes concrete efforts at lowering inflation and stimulating growth, something he's effectively in a position NOT to do, thanks to telegrams from 10 Janpath telling him to do the opposite in order to buy enough votes via handouts for a UPA-III. Attempting to browbeat or tax people away from gold so he can balance his books will just blow up in his face.

I do not support GoI telling anyone whether or not to invest in gold. They fact that people do so proves their economic literacy - they see the value of currency being eroded and turn to the culturally familiar storehouse of value. It may make for a poor liquid investment vehicle, but it is a very good store of value in an economic milieu where the price of everything is going up around the mango man. Gold imports will decrease as a fiscal issue if GoI does what it's supposed to do - implement reforms and administer effectively with the goal of price stability and real economic growth.

RamaY · Post by **RamaY** » 05 Mar 2013 22:42

Suraj,

Gold is the 2nd best currency in Indian economy. People can take loans, sell it quickly and get some cash. It has better liquidity than any other investment option for common public. The millions of illiterates cannot have Bank accounts, forget about DEMAT accounts and there is no alternative to Gold in the immediate future.

We should discuss the idiocracy of PC/MMS/Montek etc that are creating havoc in India's macro and micro economic environment before people can talk about silly things about a mother/daughter wanting to buy gold ornaments and some how link it to economic fortunes of India.

I strongly protest against Theos/Others references to Hindu inspired traditions in India for all sundry problems. Every time people make such nonsensical extrapolations, I am going to call out the EJ/Dhimmi ideology that is a plague on Indian consciousness.

Suraj · Post by **Suraj** » 05 Mar 2013 22:56

RamaY: Theo is entitled to post his own opinion, as are you. Please stop seeing everything in binary terms as an affront to Hindu tradition. Theo makes valid technical points in this technical case even if I don't really have much common ground with his position - the inefficient gold buying and trading practices mentioned aren't necessarily false; I just happen to disagree with him when it comes to whether people are aware of it - his implication seems to be that they're not, while I believe people are aware and willing to accept the transactional loss as one that's less than the erosion of value of people money they'd otherwise hold.

It does lower economic activity - gold pays no interest, and there's no regime of gold back investment vehicles that are popularly accepted, in order to put the 30,000 tons of domestic gold to work generating income. What it does instead is play the role of a defensive move against the erosion of savings value, which is why I stated my position that GoI has no business lecturing the people without being an exemplar at doing what they're supposed to do, which they are far from today.

RamaY · Post by **RamaY** » 05 Mar 2013 23:17

^ Fair enough!

Can't we say the same about everything else? What about investments into 2nd home/plot? What about investment into Consumer Electronics goods, which have <2-3 yr life span? What about investment into personal auto vehicles?

Only the super rich horde gold. The middle class (Rs 2-5L annual income) can hardly afford 10-20 gms (Costs Rs 25-50K) of gold per year after meeting their expenses, that too if they want. The poor can afford gold only during the most important moments of their lives. Gold is the only thing that offers best liquidity in addition to much undervalued "happiness" for most women (and men) folk. Imagine the happiness of a middle class mom when she buys a gold ring/ear-ring/necklace to her daughter. Can anyone put a price on it?

Isn't importing and buying gold economic activity (even if it is one time)? Isn't ornament making/remaking an economic activity? Isn't gold-finance an economic activity? Even if we assume just one gold-smith per village, This industry is employing more than 500,000 people; that too for generations. This is equivalent to Rs 50,000 crore investment every 20 yrs (assuming 1000 crore investment creates 10,000 permanent jobs). Add the other employment opportunities (Jewelry shops, finance etc.,) you are looking at ~100,000 crore investment (~$20B).

Assuming India spends $30B/Yr for gold imports, this translates into ~5% RoI for the overall economy, while giving the liquidity and hedging options that Gold does.

What other options Indian Public has?

RamaY · Post by **RamaY** » 05 Mar 2013 23:35

Suraj

Gold performance in past 20 years is ~7% in $. Add Rs devaluation during this time (1994: 1/36, 2013 1/54) and you will get 9% rate of return.

P Chidambaram is an idiot. Instead of managing and leading the economy, he is trying to manufacture economy to suit his immediate political fortunes. And other idiots follow him.

vishvak · Post by **vishvak** » 05 Mar 2013 23:44

How about a movement to free hydrocarbons from clutches of greedy international uncultured monopolies - that indulge in worldwide transfer of wealth because of greedy uncultured lifestyles at cost of others? How about movement against patent regimes that halt other's progress in very uncultured way?

What have we done about freeing up exclusive right to sell crude and could that be considered cultured at all?

Wouldn't all such movements benefit all Indians and avoid paying huge monies to greedy uncultured monopolies?

Can people sidestep such greedy uncultured issues at all? All this going on for decades and we are talking of gold?

RoyG · Post by **RoyG** » 05 Mar 2013 23:56

vishvak wrote:How about a movement to free hydrocarbons from clutches of greedy international uncultured monopolies - that indulge in worldwide transfer of wealth because of greedy uncultured lifestyles at cost of others? How about movement against patent regimes that halt other's progress in very uncultured way?

What have we done about freeing up exclusive right to sell crude and could that be considered cultured at all?

Wouldn't all such movements benefit all Indians and avoid paying huge monies to greedy uncultured monopolies?

Can people sidestep such greedy uncultured issues at all? All this going on for decades and we are talking of gold?

Kalkiji has descended from heaven.

RamaY · Post by **RamaY** » 06 Mar 2013 00:07

Another Idiotic concept of GoI.

Life Insurance Corporation of India (LIC) (Hindi: भारतीय जीवन बीमा निगम) is the largest insurance group and investment company in India. Its a state-owned where Government of India has 100%stake.

Now how is it divestment when LIC buys the shares of other Govt owned companies?

Only idiots like P Chidambaram and his congress boot lickers can explain.

vishvak · Post by **vishvak** » 06 Mar 2013 00:09

^^ It is an opinion.

Suraj · Post by **Suraj** » 06 Mar 2013 00:11

RamaY wrote:^ Fair enough!

Can't we say the same about everything else? What about investments into 2nd home/plot? What about investment into Consumer Electronics goods, which have <2-3 yr life span? What about investment into personal auto vehicles?

By all means... all those are valid arguments and would have been the best way to respond to Theo to begin with.

I'm aware gold has been a stellar performer since the early 2000s - I have been holding GLD (among others) for long

But the fact remains that it an inflation hedging storehouse of value, not a base of productive capital, or for that matter a viable day to day currency. Before you go 'it used to be in the 17th century', this is the 21st. Gold presents significant transactional convenience issues. It is hard to accurately value without every person having a measuring scale and weights. A Rs.100 note on the other hand, is a Rs.100 note, as long as it's valid. The only issue is that what you get for Rs.100 today may cost more tomorrow.

RamaY · Post by **RamaY** » 06 Mar 2013 00:17

Suraj,

There are two parts to the argument. One is economic logic, which I presented. Second is the so-called Dhimmi/EJ logic, that too is given a suitable response.

amit wrote: Buying gold is due to the undue importance the yellow metal has in our society. Buying gold is also due to bad investment decisions taken with the mistaken idea that gold is a safe haven investment.

Theo_Fidel wrote: That said it is a social problem that is hard to change. I can guarantee one thing, buying gold is a sure way to stay poor. No one ever got rich buying gold, other than trader types. The rich never spend more that a tiny fraction of their income on gold. It is the poor and middle class who get taken to the cleaners.

India has ~300 families. Even if each family buys just 10gm gold per year, we would be importing 3000 tons of gold. The fact that only ~700 consumed per year indicates that
- Only the middle and upper class segment is consuming gold. (100 million families?)
- That our gold consumption is not that bad, much less it is a "social" problem (aaak thoo)

The so-called advanced Christian and Muslim economies also waste money on even less worthy diamonds, which are more difficult to liquidate.

The main contributor to the rise of diamond sales in the US is the city of New York. New York alone accounts for more than 50 percent of diamond sales worldwide. In 2005 alone, diamond sales in New York amounted to almost $34 billion.

As diamond sales in the US continue to increase, new diamond capitals are emerging. Two of the countries that have experienced significant growth as far as their respective diamond industries are concerned are the United Arab Emirates and China.

The UAE market, particularly the Dubai market, is characterized by high-end individuals so the type of diamonds being sold there tends to be high end also, usually ranging from the $10,000 to $100,000 price range.

Suraj · Post by **Suraj** » 06 Mar 2013 00:22

RamaY: Please stop labeling others dhimmi, EJ, anti-Indic, whatever.

RamaY · Post by **RamaY** » 06 Mar 2013 00:38

The funny thing is some how Govts/ReserveBanks holding Gold is called Reserves as a guarantee for the very Rs 100 note where as individuals holding Gold is "social" issue.

I think the real tummy-ache is about Indian's behaving like little Indias when it comes to economic freedom {deleted}

If a Rs 100 note has less value tomorrow than today, why is it illogical and less-efficient a 10gm gold ear-ring having less value tomorrow than today? Of course we can quantify the efficiency but past 10-15 years the numbers show that gold has been a more efficient instrument of wealth than Rs 100 note.

What can I say, when people say do not use past 15 years data but believe them (some people even guaranteed that it is a sure way to stay poor). And it is preposterous when the same economists say they want aam-admi to buy gold bonds (a paper/software instrument that may/maynot have real gold behind it) to their hearts content. I can only smell EJ conspiracy because gold bonds are one sure way to divert Indian wealth to west (who controls world gold-bond markets?).

Uttishtha Bharata

(Satya-Anveshi - I always wanted to say this in Economic context)

Suraj · Post by **Suraj** » 06 Mar 2013 00:44

Please realize this - the RoI of gold is the same as the debasement of fiat currencies. The RoI of gold depends on policy actions that debase fiat currencies - wars, economic regression or actions that result in the expansion of the monetary base and inflation, which drives up the nominal price of gold, because it is an extremely low maintenance store of value as a shiny inert metal. Unlike diamonds or precious metals, its value is not based on its shape or cut, but is purely a function of its mass (ignoring the premium associated with producing jewelry, which is just a labor value add component). In an economic regime where price stability and real economic growth are both established, and people have confidence in the administrative system, gold would be a fairly bad investment in relative terms. It is no surprise that gold spiked twice in the past century in fiat currency regimes (i.e. not during gold standard era) in the immediate circumstance of wartime - Vietnam in the 70s and AfPak/Iraq in the 2000s.

RamaY · Post by **RamaY** » 06 Mar 2013 00:53

^ Exactly my point.

Given your logic, Gold is as good as Rs 100 note in the fiat currency regime.

Coming to 18/22ct and 24ct logic, one can compare this with the difference between carrying Cash and Credit/Debit cards. It is a matter of convenience, durability and fool proof. One cannot wear 24ct gold.

Basically Gold is a simple economic instrument that is suitable for Indian context. It may cease to be used as economic instrument once India reaches the western levels of financial sophistication.

But the consumption of gold as an ornament, social symbol, religious instrument is purely Indic centric. People criticizing it on this basis is OT for this thread.

RoyG · Post by **RoyG** » 06 Mar 2013 01:02

RamaY wrote:^ Exactly my point.

Given your logic, Gold is as good as Rs 100 note in the fiat currency regime.

Coming to 18/22ct and 24ct logic, one can compare this with the difference between carrying Cash and Credit/Debit cards. It is a matter of convenience, durability and fool proof. One cannot wear 24ct gold.

Basically Gold is a simple economic instrument that is suitable for Indian context. It may cease to be used as economic instrument once India reaches the western levels of financial sophistication.

But the consumption of gold as an ornament, social symbol, religious instrument is purely Indic centric. People criticizing it on this basis is OT for this thread.

Right. Gold will always be there in every family b/c economic changes will always be there. It's wealth preservation.

Suraj · Post by **Suraj** » 06 Mar 2013 02:08

My bad. I ended up editing RamaY's post instead of quoting it

Sorry! What I wrote was:

I don't know what the debate here is. My sole point is that gold is a very good store of value in an inflationary environment, but a bad currency. The most basic requirement of a currency is that it should be easy to transact and value. Gold is not, because of its implicit value based on its own scarcity. It requires substantial investment on the part of everyone transacting it as a currency, to value it by mass. Fiat currencies are convenient because they are merely representations of value on paper.

RamaY · Post by **RamaY** » 06 Mar 2013 02:36

Suraj garu,

The whole debate is about

1. PC's statement - that stopping gold imports will reduce current account deficit by half. This illogical in a open economy. What next, if we stop trading with external world (either exports/imports) we will have no current account deficit?

2. Theo/Amit's posts - They extended PC's logic and made it a social ill of India.

Do you really think PC/Theo/Amit do not know the basics and do not have access to the info I produced? Then why do they think the way they think? It is because they think "certain" way.

And the debate (most of the debates) is mostly about "the way people think". The facts are facts. People make inferences they want.

We have seen the impact of the "Certain way" on Indian economy.

nachiket · Post by **nachiket** » 06 Mar 2013 03:00

Do you really think PC/Theo/Amit do not know the basics and do not have access to the info I produced? Then why do they think the way they think? It is because they think "certain" way.

And the debate (most of the debates) is mostly about "the way people think".

So because you don't agree with the way others think, you go ahead and brand them EJ's and whatnot. Makes perfect sense. I too think that our economy is affected adversely due to our fetish for gold. Guess I'm an EJ as well. Who knew!

Anyways, what PC said was technically true. Stopping gold imports for a year would substantially reduce our deficit, just as stopping our oil imports would. The fact remains that both are impossible for the government to do. So for the finance minister to make such a statement is utterly ridiculous. The only thing it betrays is that he is powerless to reduce our deficit in any way that the government can actually control for whatever reasons. PC is telling us that he can't do his job, so the Indian people should do it for him.

Theo_Fidel · Post by **Theo_Fidel** » 06 Mar 2013 04:51

Interesting chart.

Theo_Fidel · Post by **Theo_Fidel** » 06 Mar 2013 04:52

Another interesting chart.

It also obvious that what is causing problem is the price of gold. It has inflated out of control saddling us with a bigger and bigger bill. Just 6 years back our import bill would have been just $25 Billion for the same amount of gold. Demand and price appear to have decoupled. This can only be called a gold bubble.

Suraj · Post by **Suraj** » 06 Mar 2013 05:22

RamaY wrote:They extended PC's logic and made it a social ill of India.

I've no problem with your refuting that. I wrote on the same lines - that people were willing to acquire gold even by inefficient means and take one-time hit in the form of a markup, than hold cash that's constantly losing value. By buying gold, they may lose out once on transaction overheads and costs, but subsequent erosion in the value of fiat currency increases the value of their holdings.

However, I don't agree that gold is a stable long term investment choice. Its nominal value is very much dependent on the debasement of fiat currency due to monetary inflation. As a defensive holding in such an environment, it continues to reign supreme. However, it is not an efficient allocation of capital for development and growth, and its popularity with the mango man is also tied to a cultural memory of hardship and the need to preserve the value of savings.

What would be a more effective investment is the ability of state/local bodies to issue tax-advantaged bond measures to invest in infrastructure and facilities. Right now, such a scheme does not exist at all, partly because the current devolution of fiscal powers between centre, states and local bodies doesn't permit that, and because there are few administrations that generate enough credibility for bond buyers to not demand ridiculous coupon rates due to perceived lack of guaranteed and timely completion of the underlying project.

There are several problems overall. Our ability to harness and deploy capital is poor due to lack of a developed domestic bond market, or substantial participation in bank savings (with the money instead being spent on gold holdings) and the lack of confidence in administration precluding the ability to easily issue such bonds. It would also help to NOT have an administration that has effectively been sitting on its haunches and sucking its thumb for the last few years...

RamaY · Post by **RamaY** » 06 Mar 2013 06:29

Suraj

I answered both aspects of Theo/Amit. One is economic reasons behind Indian consumption, while refuting their social-ill nonsense. I know you would have liked me limit my post to the economics and ignore the social-ill nonsense. But I am not like that and prefer to answer both aspects because the nonsense of congress-nomics has done too much a damage to India. I will leave this point with this.

If you read the graphs Theo posted, you can understand few things, especially if you read them from Indian context.

1. Indian gold consumption is moving along with wealth creation in India.
2. Indian gold demand is not the only cause of world gold prices, especially given the recent purchases by national reserve banks across board. (2011 world production gold = 2700 tons vs Indian domestic consumption 700 tons)
3. There is no strong correlation between gold import growth and gold price.

I already presented the RoI on gold investment in past 20 years, 9%, which is reasonably better than bank FD rates in India. Secondly gold consumer industry employes ~1 million people in India, which is the bonus ($20b investment). If you add these two, you are looking at >10% ROI on gold investments in past 20 years.

There already exist infra bonds which give 6% ROI but have some tax benefits. They were created to attract black money, but not sure of their success. Who would buy infra bonds, that give 6% RoI when the inflation rate hovers at 9%?

On top of it how many people have access to financial instruments such as govt bonds in India? Where is the education? Where is the infrastructure? Where are the financial opportunities for small investors? Why hasn't the Congress govts which ruled India did not achieve 100% literacy till now?

I seriously doubt we have lack of capital in India. As a finance minister, the idiot PC should focus on tapping the wealth of India to get better ROI for Indians. What financial policy changes did he announce in his life? What value did he create to India thru his policies? How could his wealth grow 1000 times in past 10 years where as Indian economy grew hardly 100%?