Thursday, November 21, 2013

Indians and the barbarous relic

From The Economist:
The second reason why gold is popular is that it allows you to bypass a lot of India’s legendary red tape. Opening a bank account in India is bureaucratic hell. Gold, on the other hand, is widely accepted without any documentation. It is also a fine way to store wealth without paying tax—along with property, it is the asset class that the authorities struggle to track. Some reckon that the huge boom in gold has closely tracked the boom in political corruption over the past decade.
At the individual level, then, the gold craze makes sense. But in aggregate it is a disaster for India. Imports of bullion impose a massive strain on its balance of payments—amounting to $54 billion in the year to March 2013. India’s current-account deficit reached an alarming 4.8% of GDP that year, and just over half of the gap was due to gold. Gold also diverts savings out of the formal financial system, where they can be harnessed for investment. Thus while India’s overall savings rate is high and on par with those of Asia’s “tiger” economies, half of those savings are now diverted into physical assets. (emphasis added)

Reference
F., P. "Why do Indians love gold?." The Economist, November 20, 2013. http://www.economist.com/blogs/economist-explains/2013/11/economist-explains-11 (accessed November 21, 2013).