Why RBI's Chakrabarty is Wrong About Indians

Reserve Bank of India deputy governor KC Chakrabarty remarked a few days ago that there should be a social and cultural revolution in India to reduce the demand for gold and ease the pressure on the country's current account deficit. Chakrabarty said 90 per cent of the gold demand is for jewellery or to offer to God. "Both have to stop," he said.

I come from Thodupuzha, a small municipal town with a population of less than 50000 in the hilly district of Idukki in Kerala. This town has about 25 jewelleries. Most of these are fairly large set-ups with multi-crore revenues. Despite the economic slowdown and spiralling prices of the yellow metal, all of them do brisk business. Collectively, they sell about 10-12 kg gold every day. Malayalees are among the most voracious consumers of gold. Their love for gold is on glittery display at every wedding, irrespective of religion or caste, rich or poor. That is, however, only one side of the story.

I would agree with Chakrabarty that gold should not be given as dowry. But the continuing practice is the failure of enforcement of laws of the land.

Thodupuzha is a commodities market town where pepper, cardamom and rubber trade in large quantities. Farmers from the hills descend on the town after harvest to sell their produce. These farmers are some of the most regular customers at jewelleries. In the 80s and 90s, when bank loans were difficult to come by, gold was handy to raise money to invest in their farms. There were a number of small financial companies that used to lend against gold. Companies such as Manappuram and Muthoot, which are today national players in the gold loan business trace back their origins to gold loan and chit fund businesses. Malayalees covet gold jewellery as ornament and also as an asset that can be put to work. Manappuram and Muthoot have sold this philosophy with increasing success in other parts of India.

India now imports a little under a thousand tonnes of gold. According to Chakrabarty, gold has no intrinsic value. "Wearing gold as an ornament was a culture when you were a rich society, when you were contributing to 30 percent of the GDP of the world. Today, we have become a poor country, we need to change our culture," he was quoted as saying.

That is an illogical statement. Gold has been a cherished metal the world over because it gained in intrinsic value as a convenient currency of exchange irrespective of geography. It is easy to carry and is the most liquid asset after hard cash. In certain circumstances, it may work even better than cash. Gold was said to be abundant in ancient Egypt but the first gold coins are believed to have been minted in Lydia in 700 BC. That is why even paper currency was backed by gold until replaced by the Bretton woods system of convertible currency after the War. In 1991, when India was faced with a balance of payment crisis, it was our stash of gold that came to the rescue.

That logic applies to personal finances as well. As Chakrabarty accuses, Indians do not buy gold jewellery just for personal decoration. It also serves as a household contingency reserve. Consider the avenues available to the average Indian for personal investment -- bank deposits, mutual funds, stocks, investments-linked insurance etc. None of them are dependable. Bank deposits can fetch at best a 10 per cent nominal return which if adjusted for inflation would have been negative for the most part of the past year. Mutual funds, stocks and insurance are all highly volatile investments, are not as liquid as gold and require a certain amount of financial literacy.

The increasing demand for gold reflects the public's lack of faith in the Indian economy. The current account deficit that Chakrabarty worries about would not have been so wide had the government taken a single decision of letting fuel suppliers charge customers at least what it costs them to buy oil. Chakrabarty has unfairly blamed the public for India's economic woes.The root cause of India's precarious finances, both internal and external, is the government's inept and callous management of the economy. Not the average Indian's instinct for self-preservation.

As for God, no amount of offerings would be less. Only He knows how the Indian economy stays afloat!

The thoughts and opinions shared here are of the author.