Indian Economy - News & Discussion 27 May 2012

[svinayak]

Vital resources(warm+water+soil)-vit­al hectares :
1.India:2 737 740 thousend vital hectares
-2.Brasil:1 160 610
-3.Central Africa:774 820
-4.China:745 860
-5.Indonesia:687 200
-6.USA:560 000
-7.Colombia,Venezuel,Guyana,Sur­inam:472 530
-8.Russia:455 360
-9.West Africa:433 490
-10.Andes Country:385 630
-11.Argentina,Uruguay:319 430
-12.Australia:280 230
-13.North Africa:233 150
-14.Pakistan:228 800
-15.Central Africa North:176 710
-16.Bangladesh:157 000
-17.Papua:134 720

[RamaY]

RamaY,

At the risk of triggering the gold discussion hungama yet again, countries have confiscated gold as well in the past.
Make no mistake if all the Cyprus money was in gold and the system had essentially lost $100 Billion the sovereign will confiscate the gold as well.
Many countries in such circumstances have made the possession of gold illegal. If you can't sell it what use is it to you. gold is only valuable because of the cash economy allows folks to exchange it for cash.

But your point is taken that it would be harder for the govt to rob you. IMHO the negatives out weigh this small gain however.

This is probably OT here...

India is not USA for the govt to make gold illegal. This is the problem with viewing India from western mindset/perspective.

[nachiket]

India is not USA for the govt to make gold illegal. This is the problem with viewing India from western mindset/perspective.

Gold Control Act 1962

After the Indo-China War in 1962, due to loss of foreign exchange reserves, the government of India enacted the Gold Control Act., 1962, prohibiting the citizens from holding pure gold bars and coins. The old holdings in pure gold had to be compulsorily converted into jewellery and that had to be declared. Only licensed dealers were allowed to deal in pure gold bars and coins. New gold jewellery purchases were either recycled or smuggled gold. This legislation killed the official gold market and a large unofficial market sprung up dealing in cash only.

[svinayak]

That is because GOld smuggling was being supported by Dubai and other countries including UK in the 60s to reduce the control of the newly independent India.

Indian economy was the target by stealth by the western countries

[nachiket]

^^Gold smuggling actually increased after that act. People could not buy gold legally, so they had to do it secretly. Which is why even though I am against the gold hoarding proclivity of Indian society, I admit that the government interfering in reducing that is not a viable solution beyond a point.

Karim Lala (dawood's one time boss) and Haji Mastan built their underworld empires smuggling gold, amongst other things.

[Dileep]

If the guvermand makes holding gold illegal, good! The price of gold bars is going to increase in black market. It will be like having dallahs back when Rs was controlled. You will get much more money in cash for your gold bars. That's all there is to it for an aam aadmi with a couple of them in their locker.

[vishvak]

Gold is really OT here, its not like govt gives tax break on buying gold, in fact govt taxes it. After explicit taxes double whammy- on gold out of own pocket nothing much is relevant- it is all OT.

[nawabs]

Current account deficit soars to record high of 6.7% in third quarter

http://profit.ndtv.com/news/economy/art ... ter-320163

India's current account deficit (CAD) for the third quarter of the current fiscal year widened to 6.7 per cent of the gross domestic product (GDP) compared to 4.3 per cent in the year-ago period and 5.4 per cent in the previous quarter.

In value terms, the deficit stood at $32.6 billion.

[Pratyush]

^^^

What is it that GOI can do in order to reduce the CAD. Or they will not touch it feeling that their vote winning schemes will suffer, if, they chose to control CAD.

[RamaY]

XPosting from BRICS thread... Gives the rationale behind Theoji's original point...

India is China's competitor in many realms w.r.t trade...

Both need energy imports. Both want to be the manufacturing hubs of the world importing raw-materials and exporting finished goods. Both have large local populations.

India needs to move fast in establishing basic industrial infrastructure so it doesn't import nonsensical stuff like paper boards, plastic toys etc for internal use.

90% ($150b)of India's trade imbalance comes from two key areas - Energy imports ($100b) and Gold/Pearls/Jewelry ($50b). Theoji's contention was that India can live without Gold imports; as energy imports are a must have to increase industry production.

[vishvak]

CAD depends on internal as well as external factors. For example increase in exports, reducing expenditures by govt, reduced dependence on expensive oil imports, increase in domestic production of oil and natural gas, etc. and many more could be factors that could be managed internally; creating markets outside for Indian products, better management of oil and natural gas imports, creating and leveraging international fair markets against monopolies, acquisition of resources and technologies, etc could be managed well for dealing with external factors.

Expecting and leveraging fair markets internationally is a key factor for India in scenario of CADeficit.

[Suraj]

Several countries have policies restricting imports of consumables, as a means to check current account imbalance. Even India did in the past, when import substitution was a policy. However, others - Japan, Korea etc - combined it with export promotion, something we did not. On the other hand, gold possession is culturally ingrained in India, and attempts to curtail it will be violently opposed. I don't see any easy answer, short of buying from parties who will accept payment in Rupees in exchange for our exports.

[RamaY]

Suraj

There are many strategies at GoI's disposal.

1/ They can control the imports of non-essential items (this can include gold too)
2/ They can identify the items where India has necessary material, industrial and supply-chain base and promote increased capacity while putting controls on their imports
3/ Develop/encourage industry for the items that are good for national consumption and also for exports
and so on...

Check this place to see what India imports, exports and balance of trade is...
http://www.intracen.org/trade-support/trade-statistics/

It is silly for an agrarian nation like India, with its vast arable lands and high population demand for food grains, to have a $150B petro-chemical imports and ALSO a $8+B fertilizer imports while having a good fertilizer industry know-how.

It is a stupid idea for a nation like India, who is a member of WTO, to curtail imports of certain items especially things like Gold, which is a currency equivalent and hedge. The jewelry can be converted into Gold bars and vice Versa and thus part of national wealth.

Instead GoI should focus on becoming self-sufficient in key national interest areas and identify ways to reduce reliance in other sectors.

India, having 15-20% of world population, should be able to produce an internal GDP & trade of 10-15% of world GDPtrade that is $15T/$2T. That is its sweet spot.

[Theo_Fidel]

I’m still baffled that our gold imports went from aprox 200 tonnes per year to 1000 tonnes per year in 8 years flat. Even recession only put a small dent on it. At this rate when our GDP is $10 Trillion, possibly 2030, our gold import will be 5,000 tonnes per year. This will be 2 times present global production! Essentially ~ 50% of all gold produced on the planet is now consumed by India, we are single handedly keeping the gold markets of the world afloat. This is not sustainable.

I have pointed out earlier that we now spend more on gold than we do on housing.

Here is another nugget. We spend roughly $30 billion on education. So we spend twice as much on gold as we spend on education.

http://articles.economictimes.indiatime ... vey-office

[RamaY]

Theo ji

You are doing a linear progression. How can India alone import double the global production? Is it logical?

What happens in such a scenario?
- the gold price increases.
- this will make other investment options more attractive
- this will also give the already existic gold savings reasonable RoI

At the end demand-supply will have to balance.

[Suraj]

My issue with 'gold is a currency' here is that we're paying for this currency in another currency, not our own. In other words, it's a consumption item, not a traded good. Please take a moment to think carefully about this, instead of reflexively screaming that I'm claiming gold is not a currency, or throwing some other gold bug argument out.

Unconstrained gold imports expose us to the exchange rate risk associated with paying for one currency with another, neither of which we control the value of. Worse, our demand makes them dearer since we're the largest market player. While it may be completely true that the solution lies in fixing our economic policies to make people less inclined to invest in gold and instead choose domestic equities or bonds, it is also true that leaving gold imports unconstrained will make such policy action harder to accomplish because increasing amounts of foreign exchange have to be devoted towards this import.

[RamaY]

Coming to Gold and Education comparison.

This is rhetoric to begin with. But let us see the details to understand why it is not purposeful to go into such self-flaggation and prejudicial economic perspectives.

30 billion in education means 30 dollars per head per year. Assuming only 30% of the population is in that age group we are looking at 90 dollars per capita investment. This is equal to Rs4500 or Rs 400 per month.

Assuming a 30:1 student:teacher ration this works out to be Rs 12000 monthly salary per teacher.

In India we do not have 100% school attendance and 30:1 student:teacher ratios. So this amount sounds logical

Coming to gold investments, this investment/consumption is made ONLY AFTER AND IN EXCESS OF meeting basic needs of the family such as food, education and yes - basic housing. Here housing doesn't mean air conditioned, solar paneled houses.

That $50B investment in gold indicates that IF/WHEN quality and universal education is made available to all Indians, INDIA HAS THE FINANCIAL RESOURCES TO PAY FOR IT.

Now that removes the air from INDIA IS A POOR COUNTRY rhetoric.

All your posts are over Indian public where as the blame is squarely on GOI shoulders, the political dispensation you support without any hesitation ONLY because of your silly prejudices against Bharatiya history, dharma and culture. Your prejudice is so great and poisonous that you would rather support the termite Congress system at the cost of billion+ Indians, just because it will allow your creed to grow. That is the curse of this nation.

[RamaY]

My issue with 'gold is a currency' here is that we're paying for this currency in another currency, not our own. In other words, it's a consumption item, not a traded good. Please take a moment to think carefully about this, instead of reflexively screaming that I'm claiming gold is not a currency, or throwing some other gold bug argument out.

Unconstrained gold imports expose us to the exchange rate risk associated with paying for one currency with another, neither of which we control the value of. Worse, our demand makes them dearer since we're the largest market player. While it may be completely true that the solution lies in fixing our economic policies to make people less inclined to invest in gold and instead choose domestic equities or bonds, it is also true that leaving gold imports unconstrained will make such policy action harder to accomplish because increasing amounts of foreign exchange have to be devoted towards this import.

You are 100% right.

Why are Indians going behind gold? Because there are very little other options to
1/ for investment with safe RoI
2/ for celebrating their lives

Economy and trade do not come from thin air and sustain on their own. They are nothing but the "language" of a soceity's consuming/producing behaviors.

[RamaY]

Here are the basic categories where India has +ve Balance of Payments


As one can see India has a strong Agri+Apparel export industry. Then the question is how come India needs Food Security? Because the agro products are getting exported instead of feeding fellow Indians

Secondly only recently we see Industrial, Shipping/Aerospace/Auto etc fields coming on to Positive side of trade balance. That means India has lot of potential here because they can ZERO the imports (thus making it a higher +ve impact on trade balance).

This is what GOI and the Finance Minsiter, Idiot Chidambaram, should be doing instead of making silly statements about Gold imports.

***
There are some sectors that India need to control, if it were to fulfill its duty toward Indian Flora Fauna.
1. Stop exporting Animals and animal products that would lead to eco-imbalance. This is hardly a $B+ industry and helps only certain communities. They need to be helped out of this nonsense.
2. Food grains - First feed India before exporting elsewhere.

On the other hand,
by helping an SMB approach and helping the farming sector to get access to capital and technology it can make certain Agri exports compensate for these losses and also reduce our energy sector.

[Suraj]

You are 100% right.

Why are Indians going behind gold? Because there are very little other options to
1/ for investment with safe RoI
2/ for celebrating their lives

Economy and trade do not come from thin air and sustain on their own. They are nothing but the "language" of a soceity's consuming/producing behaviors.

Maybe so, but the argument that gold is a currency and therefore needs to remain unconstrained, is not credible when it hampers policymaking. It's not strictly a currency unless we can swap it with our own, without any intermediary risk. Right now, that is not the case; it is a store of wealth, but not a currency. From a transactional viewpoint, gold is not a currency except in the narrow context of paying for Iranian oil. From a cultural viewpoint, constraining gold consumption is no different from constraining purchase of clothes or any other consumption item when money is tight.

Besides domestic policymaking that encourages people to invest in equities, bonds and other fixed income instruments, and export incentives to bridge the current account deficit, GoI also needs to encourage payment for both gold and oil with Indian products and Rupees. Having to pay in dollars distorts the issue and makes the task of managing these twin import burdens harder.

[RamaY]

^ Earlier we discussed how Gold is treated as currency-equivalent in spite of those risks. The gold-mortgage is very common and least procedural.

For many middle and lower-middle class people gold is not a store of wealth but also a currency.

[Suraj]

That is just on a theoretical basis. In theory, chana dal can be a currency too. In reality, gold is not a currency today. Common gold transactions via jewelry is an inefficient mechanism where the buyer faces a nominal loss everytime something is done with his gold jewelry holding.

[RamaY]

^
1. An end consumer cannot get loan against chana-dal, whereas they can against a small (<5gms) gold ornament at a reasonable interest rate. Of course exceptions apply where some sons get loan against their mothers.

2. There is a huge secondary financial services system based on Gold in India. I am sure this is big enough to support this craze towards gold investments - in bars or in ornaments.

3. End consumer always loses a money in reverse transactions irrespective of the item, even currency. Start with Rs 100,000 and try to sell/buy US dollars and tell us how much you will have in hand after say 10 transactions (while keeping the exchange rate constant) using the Buy/Sell rates.

[Prem]

Manufacturing Ayyo re: Election Karvayo Reh:Foreigner Paisa Lagayo reh
Foreign investors waiting for polls to invest in India: Fitch

NEW DELHI: Asserting that foreign investors are convinced about growth potential here, global ratings major Fitch's Indian unit chief says that much of the investments would start pouring in after general elections. "There are some investors already setting up plants here and putting money in other businesses, although there are some who have pulled back and are waiting on wings," Fitch Group's Indian unit India Ratings' CEO and Managing Director Atul Joshi said. "These investors want to see how the reforms unfold in coming months. But most of the investors are saying that once the elections are over, we will come in. "The questions are only about the timing of investment, and not about the investment as such," Joshi told PTI in an interview here. General elections are scheduled to be held sometime in the first half of 2014. He further said that most of the foreign investors are convinced about the growth potential available in India and they have taken a decision to invest in India. "That is a done deal, what they are questioning is whether this is the right time to come in, or should they wait for 12 months or 18 months and then come in," the India Ratings chief said. "These are the questions right now before most of the overseas entities planning investments in manufacturing and services sectors," he said. It is being debated for many months now as to whether foreign companies are not opting for India due to lack of economic reforms and uncertainty over policy matters. Joshi, however, ruled out any large scale exit of foreign investors from the country. "If one was to simply go by the FII inflows in the last two months, the money is coming in big time. So, I don't think that FIIs are not convinced about our growth prospects," he said. Joshi said that various estimates put India's economic growth rate for the next fiscal in the range of 6-6.5 per cent, while Fitch also sees it about 6.1 per cent. "People are still talking about economic growth, that too for an economy size of $1.8 trillion which is huge by any standards. "If you look at any of the luxury brands from across the world, the destination is India. Who's who of the world, be it in businesses like automobile, consumer goods, luxury products, private jets, they all are coming to India as the demand is very strong here," Joshi said.

[Suraj]

RamaY: others (Theo, amit etc) have already answered your claims - gold based transactions are loaded against the consumer because of various reasons, from marked up labour charges, to buy-vs-sell spread, to purity issues to measurement. I'm not going to rehash that again. Simple example: buy Rs.X worth of gold from a jewelry store and walk across the street to another and sell it to them and see if you can get back Rs.X ... until you can do that with ease and no hassle, your gold is not a currency.

[RamaY]

^
Suraj - Buy a luxury car and walk to the next store and try to sell it.

This is a nonsensical argument to say the least. By that logic every consumer item is a waste of investment.


An hypothetical currency transaction...
Buy Sell
USD 53.87 54
Txn 1 1851.851852
Txn 2 99759.25926 1847.39369
Txn 3 99519.09808 1842.946261
Txn 4 99279.51507 1838.509538
Txn 5 99040.50883 1834.083497
Txn 6 98802.07797 1829.668111
Txn 7 98564.22112 1825.263354
Txn 8 98326.93688 1820.869201
Txn 9 98090.22388 1816.485627
Txn 10 97854.08075

Loss at the end of 10th transaction -2145.919247

[RamaY]

Suraj

The reality is indian consumers buy Gold.

Now GOI can control/influence it by some jackass policy. The end result will be
1. Indian consumers will still buy Gold
2. A new Mumbai/Dubai type mafia gets created and will cause terror attacks at its choice.

That said, it is very silly for people to say it is somehow good to consume Cars/Cosmetics/Others/Electronics but not good to consume Gold. At the end of the day the real value of a consumer item is its "perceived" value by the consumer.

Coming to "Gold as Currency" option - That is what history is filled with and even Reserve Banks all over the world are maintaining Gold reserves. Indian Public are their own swiss banks, with "acceptable/self-aware" haircuts.

[Suraj]

Very good - gold jewelry is the not much different from a luxury car here - a consumable that loses value in each transaction, NOT a currency. That's for reinforcing my point with your example.

You want gold to be a currency ? You should talk only about Kruggerands, Gold Eagles and other standard purity and weight based denominations. Most in India do not deal with any of that. They deal with gold as a consumable in the form of jewelry, where each transaction nets them a loss, and the only reason it's better than a car is that unlike a car, gold does not depreciate with age into just scrap value. However, the way gold is currently transacted in India does not serve the purpose of a currency, and is not even a good store of value because it cannot be transacted without a substantial loss due to nonstandard form.

[RamaY]

I never recommended the "Gold as Currency". I just supported it as a valid alternative investment option; in line with RE, Stocks, Houses, Cars etc., with its own Risk/Reward profile. In that sense Gold is a valid and valuable import option.

All I was saying is the chest thumping against Gold imports is not purposeful.

[nachiket]

^
Suraj - Buy a luxury car and walk to the next store and try to sell it.
This is a nonsensical argument to say the least. By that logic every consumer item is a waste of investment.

Nobody is making the argument that luxury cars are a currency.

[RamaY]

Nobody is making the argument that luxury cars are a currency.

Nobody is making the argument that Gold is a currency. It is a valid Investment option, in all its forms; as good as Stocks, RE etc.,

[Suraj]

We need a face palm icon here

[RamaY]

^+1

P.S: Like I said Theoji and I are the most abused on this forum. We stand for different perspectives, at least in debates. Who knows we might be brothers in past/future lives with four wives each

[RoyG]

That is just on a theoretical basis. In theory, chana dal can be a currency too. In reality, gold is not a currency today. Common gold transactions via jewelry is an inefficient mechanism where the buyer faces a nominal loss everytime something is done with his gold jewelry holding.

Nominal loss? Gold is gold. A piece of gold 10 years ago still holds its value today and that includes gold jewelry. Its the value of paper currencies which is going down. Central banks aren't stupid and are preparing for a a return of the gold standard as dollar trade is decreasing at 1% a year which is why they are accumulating gold. It's a storage of wealth not meant for everyday trading.

[Theo_Fidel]

Who knows we might be brothers in past/future lives with four wives each

YamaR,

Don't even kid about that, ever...

[RamaY]

Sorry Theoji!

[Suraj]

Nominal loss? Gold is gold. A piece of gold 10 years ago still holds its value today and that includes gold jewelry. Its the value of paper currencies which is going down. Central banks aren't stupid and are preparing for a a return of the gold standard as dollar trade is decreasing at 1% a year which is why they are accumulating gold. It's a storage of wealth not meant for everyday trading.

There's always a nominal transactional cost associated with buying or selling gold. The least costs are associated with gold in the form of standard denominations like state issued coinage. Even so, merchants may add an cost to confirm purity etc. Gold in the form of 22K jewelry is even less fungible, with both the seller and buyer adding their own labor costs to create the jewelry and to subsequently melt it down.

Gold as an investment vehicle depends on the profligacy of government. A fiscally prudent government policy framework will lower the nominal price of gold by reducing speculative activity and causing capital to go into other more productive avenues. A substantial move into gold is a reflection of people hedging against inflation. Further, in such a situation people are against government policy-making improving, because they value of their gold holdings depend on the government debasing the currency. Being a speculative commodity based investment, gold is liable to rapidly lose (or gain) value depending on macroeconomic circumstances.

Gold therefore does not make a particularly good currency, nor a particularly frequently tradeable investment; it's effectively a inflation protected mutual fund with an entry and exit load plus buying and selling commission.

[vera_k]

I can't find the link now, but I read another explanation for the craze for gold in India.

Essentially, the article stated that the government's authority to tax is not completely established, and accepted by the people. Further, the tax exemption for agriculture, coupled with socialist polices and the fact that 60% of the population survives on agriculture contributes to disrespect for the taxing authority of the government. So gold is bought to protect wealth from the hands of the government, which might otherwise seek to tax it.

[RoyG]

There's always a nominal transactional cost associated with buying or selling gold. The least costs are associated with gold in the form of standard denominations like state issued coinage. Even so, merchants may add an cost to confirm purity etc. Gold in the form of 22K jewelry is even less fungible, with both the seller and buyer adding their own labor costs to create the jewelry and to subsequently melt it down.

22K jewelry 10 years ago will be worth more today in paper money. You're looking at short term depreciation.

Gold as an investment vehicle depends on the profligacy of government. A fiscally prudent government policy framework will lower the nominal price of gold by reducing speculative activity and causing capital to go into other more productive avenues. A substantial move into gold is a reflection of people hedging against inflation. Further, in such a situation people are against government policy-making improving, because they value of their gold holdings depend on the government debasing the currency. Being a speculative commodity based investment, gold is liable to rapidly lose (or gain) value depending on macroeconomic circumstances.

Again, you're missing the point. Gold still buys you the same amount of stuff today as it did 10 years ago. Whether a currency is strong or weak doesn't take away from its value. You have the same mentality as our beloved FM. You admit there is fiscal ineptitude and then you put the blame on the citizenry and come up with strange logic like "in such a situation people are against government policy-making improving, because they value of their gold holdings depend on the government debasing the currency."

Gold therefore does not make a particularly good currency, nor a particularly frequently tradeable investment; it's effectively a inflation protected mutual fund with an entry and exit load plus buying and selling commission.

I didn't say that it would make a good currency. Why are central banks hording the stuff? I'll give you a hint, it's not tradition.

[Suraj]

I have no problem with the idea of 24K gold in a standard form, e.g. bank minted coins or bars, being viewed as a long term investment vehicle. Keep transactions infrequent, and use a standardized form to minimize buy/sell spread, and you have the a good diversification measure. Just that that's not how it's generally transacted.

If you read my posts around the time the FM spoke what you refer to, you'd realize I both agree and disagreed with him:

I agree that the component of gold imports as a fraction of total imports has reached unsustainable levels, because we can't pay for it in either Rupees or our own wares and are building up a significant current account deficit while people attempt to defend their wealth from erosion through inflation at a time when the goal ought to be to apply those savings towards investment.

On the other hand, I disagree with him in that it's not his business to tell people to stop buying gold - his business is to work on economic and financial reforms. Making such statements made him look incompetent, and made it look like he was abdicating his own responsibility and blaming the people for doing what they found most logical under the circumstances.

Yet, this dynamic cannot turn around unless GoI actively works on reforms, and at least waves their hands around threatening to act to make gold acquisition dearer. Why ? Because people by themselves will be too conservative in moving out of gold into more productive investment avenues, and GoI has to actively make noise to get them to invest enough (even in the form of deposits in banks that get lent out) to provide enough capital to drive any reform measures they implement.

If the FM tried to talk down gold while simultaneously implementing productive reforms and making a case to direct investment there, I'd have little issue with his statements. But he didn't do that.