Gold - More Than A Metal

Posted in Finance Articles, Total Reads: 1563 , Published on 15 October 2012

Indians have a natural tendency to buy gold, either due to cultural aspect or for investing purposes. Economic Times dated 30 July 2012, carries article on how India imports a quarter of world’s gold.  Little are we aware that our inclination towards gold is weakening the Rupee in the market.

The relation seems quite strange. India's demand for gold is much more than the production. India has about 9% of the world's gold reserves, but due to weak investment in exploration and mining activities, it doesn't generate wealth out of it. It produces merely 0.4% of its entire gold consumption. Countries like Canada, South Africa and China have huge private investments in gold exploration and mining. The per capita investment for gold exploration in India is around 12 paise whereas it is Rs 4,400 in Australia.

When India imports gold, the dealers from gold exporting countries like Dubai/South Africa demand the payment in dollars. Using simple demand supply logic, we infer that this will weaken the value of rupee, considering huge demand. And this is what causes inflation that we face. Because weak rupee would mean, costlier oil from middle east (oil payment is in dollars), costlier oil would mean costlier transportation and hence more expensive, fruits, vegetables, milk etc. It would be in interest of Indian economy to import less of gold or increase internal production of gold. India's gold production is expected to increase by 20 times by 2015-2016.

In 2012 Budget, Pranab Mukherjee announced that jewelers will be paying 4% import duty on gold. The previous rate was 2%. The initial reaction from market was not good. Jewelers in India had shut shop for 10 days as retaliation against the move. Common man will have to pay 1% excise duty on non branded gold jeweler. It was announced that if there is purchase of jeweler of Rs 20 lakh or more, the jeweler will have to collect 1% tax from him in TDS (Tax deduction at source).This was a complex move by Government, which was indirectly aimed at  putting a backlash on black money and encourage more people to have PAN cards.

In order to fill the TDS form, PAN card number is required. In a population of about 120 crore, hardly 12 crore people have PAN cards. Without the PAN card, it would be impossible to proceed with the paper work. This was in fact, the main motive behind the move. To indirectly force people to have PAN cards and hence prevents tax evasion. This would also be very useful in keeping a check on black money. Hence, person who can buy gold worth Rs 2 lakh, can definitely have a PAN card. This philosophy though plausible, does have some small elements that cause confusion. One can question the cause behind choosing the value Rs 2 lakh.

In our country, Gold bars are the main form in which most of the black money travels. The most common gold bar has a weight of 100 gm or more and costs more than 2.5 lakh. Hence, the move is expected to deter the black money activities due to the requirement of PAN card. However, the critic cannot be denied that those who want to transfer black money will not buy jewellery worth Rs 2 lakh right in 1 go and from 1 single jewellery shop. Hence, this move might just ends up causing more inconvenience for common man and might help somewhat in making people own PAN cards. But it will not really help in prevention of smuggling.

However, the Government aims to levy TDS for any gold purchase which may be as low as Rs 1000. Most of the people in our country don’t have a PAN card. Hence, TDS for small purchases will cause too much trouble to common man. Hence, they planned to do it in a phased manner.

One question often arises that why so much of gold is being consumed in our country. There are a couple of reasons behind high gold consumptions here. Cultural aspect is very important here. We cannot let go of the Economic aspect. Firstly, Black money is routed via Gold bars and We are well aware of the black money level in your country. Secondly, India has numerous rural villages, sensitive areas, inaccessible areas, which don’t have access to banks. Also most of the people do not have sufficient knowledge of investing; hence gold remains the only option available for investing. They also do not possess PAN cards, hence, they are not able to invest.

This brings us to a point where it would be apt to discuss the NBFC’s (Non Banking Financial Companies), which are companies, which give loan against gold. As reported by the association of gold loan firms, the Indian gold loan market is estimated at over Rs. 3 trillion and the organized market contributes only Rs. 80,000 crore.

One example is Muthoot Finance. Depositing money in banks yields an interest which is not as much as the inflation rate. Hence, even educated people consider it wiser to invest in gold. Huge growth in this business is leading to many firms entering this business. In the early 2000s, the NBFC's in India was facing many problems: Industrial growth was slow, on performing assets, huge competition with Banking sector.

In March 2012, RBI placed a limit on the amount which NBFCs can lend against gold and it was made 60% of the value. The Indian central bank is trying to check the fast paced growth of these firms, in rapid growth of gold loan firms in recent years, both in terms of the size of their balance sheets and physical presence. Such NBFCs will have to disclose the portion of gold loans in their balance sheets and are barred from granting loans against primary gold and gold coins.

Hence, India at this point, shall focus on increasing its gold production and on the other hand, controlling the consumption. Various bodies including NSE, have introduced many courses, which gives investment education. Hence, instead of resorting to gold as the only investment mean, one can learn to invest in bonds, stocks and various other Government schemes.

This article has been authored Shivani Ghildiyal from SIMR.

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