Aug 17, 2013

All that glitters is not gold.

On Aug 15, gold rose by 0.5 per cent, to trade at $ 1,372.97 an ounce in the Singapore. This was considered to be the steepest hike in the futures market since June 19, 2013. In India, the same day, gold prices crossed Rs 30,000 per 10 grams, rising 3.56 per cent. In the next two days, gold prices surged by Rs 1,310 per 10 grams in India, the highest in the past two years. The sudden spurt in prices followed the Govt's ill-advised decision to raise import duties to 10 per cent.

In the days to come, with the festive season nearing, gold prices will further firm up.

The argument that I hear repeatedly from the Finance Minister is that gold imports have surged in the past few years thereby leading to the widening of the Current Account Deficit. His hypothesis is that investment in gold (or silver) is an 'idle investment' and does not flow back into the economy. By saying this, he is actually wanting the middle class not to invest in gold to park its savings, but to spend it on other consumer durables that will keep the wheels of economy moving.

What he is not telling us of course is that by raising the import duties and curbing the imports, he is helping the futures market in precious metals to literally make a killing. Just in two days after the decision to raise import duties, we have seen a massive jump in prices. For the aam aadmi this is bad news. After all, gold is an important part of Indian marriages (on an average 15 million marriages happen every year in India) and you can imagine the indirect taxation parents of bride and groom have to undergo by shelling out a hefty price. That's what Mr P Chidambaram wants. After all, you should be made to empty your pockets, the underlying principle on which market economy operates.

I fail to understand the economic logic. It is the unbridled consumerism has led the world to the grave environmental and ecological crisis. If the world is nearing a tripping point, if the world is witnessing global warming leading to ecological catastrophe at places across the globe, consumerism in an important reason for it. Nevertheless, what is more important to know here is the selective application of the 'idle money' concept. If investment in gold by the middle class is an 'idle' investment, what about the Rs 10-lakh crore that is being hoarded by the India Inc?

The Reserve Bank of India (RBI) has in a report spelled out that India Inc was sitting over a cash reserve of over Rs 9-lakh crore by the end of March 2012. This year, I am sure the money that is being hoarded by India Inc must have increased many fold (Reliance Industries alone is sitting over Rs 83,000 crores. http://bit.ly/14LzxFp). With India Inc refusing to invest the hoarded cash within the country, isn't this also 'idle money"? Why is that the Govt not making any effort to force the private companies to fork out the hoarded cash? Why is it quiet when it comes to the Corporate sector?

If only the Govt had forced India Inc to take out the massive cash reserves that it is sitting on, and make it invest within the country, which in the process would have created jobs, be assured the rupee down slide would have been in check. The CAD would have come down, and so would have been the fiscal deficit.

The booster shot to futures trading in gold and the inability to make the private sector cough out the hoarded cash reserves has a political link. We all know elections are around the corner. And on top of it, the Govt is unwilling to let Right to Information (RTI) provisions apply for the political parties. Do I need to say more?

1 comment:

Anonymous said...

sir
when you say why govt is not putting in effort to force the private companies to fork out the hoarded cash? I get a hunch that you are asking govt to make rules for private companies to invest in the country but will that really solve the economic problem