Amid increasing social unrest, a collapsing currency (against the dollar), and an economy at a standstill, there has been another growing fear in India that has spooked many around the world.
The rumors and speculation of an Indian gold import ban (or even an outright ban on gold ownership) have sparked panic-buying of the precious metal sending retail premia soaring at local jewelers. In an effort to quell the 'uproar', a top Indian finance minister has confirmed the government is not considering an plans to restrict holdings of gold by individuals.
As a reminder, Acting-Man.com's Pater Tenebrarum notes that in the recent past, India’s government has also launched several initiatives aimed at reducing gold purchases by Indian citizens. For one thing, it is asserted that the gold hoards held by citizens are “unproductive” and a sign of India’s backwardness that needs to be eradicated in the name of modernization. Another official reason is that government wants to lower the country’s trade deficit. Since India isn’t producing much gold, it is importing quite a lot; in recent years gold imports oscillated around 700 tons per year.
India’s trade deficit over the past decade – cick to enlarge.
The world’s governments are almost without exception comprised of economically ignorant mercantilists who believe that a trade deficit is a symptom of declining wealth. Naturally, India’s government is no different in this respect. This mercantilist view of trade is one of the most “sticky” and widespread economic errors in history (evidently, not only prices and wages are “sticky”…). It is a direct result of viewing the economy through a collectivist lens instead of through the lens of methodological individualism. The government’s efforts included raising a tariff on gold imports (ever since, India’s gold import statistics are no longer reliable, as a lot of gold is smuggled in), as well as urging the creation of assorted “paper gold” products by commercial banks.
The latter were supposed to entice citizens to deposit their gold with banks in exchange for paper receipts. You have one guess why the government would be eager to see that happen.
India’s citizens have a traditional affinity for gold. Gold is not only a “love trade” for Indians though, as our friend Ronnie Stoeferle puts it. They also buy gold because they don’t trust their government and its economic policies.
Looking good, ma’am.
As has just been demonstrated again, this is quite a healthy attitude – even if the government of the day is widely considered to be “good for the economy” (Mr. Modi’s government has indeed adopted a number of positive economic reforms as well in the past). Not only can it be very costly to trust the government, there is obviously also a big difference between looking at and fondling actual metal, as opposed to a bank receipt for a gold deposit. If you try it, you will see it is just not the same. Indian women love gold adornments and gold jewelry plays a major role as a wedding present that concurrently serves as a store of wealth. Hence the government’s efforts to “wean the citizenry off gold” have completely failed to gain traction.
It remains to be seen if the government will get away unscathed with the recent demonetization of large denomination banknotes. As Jayant has pointed out, Mr. Modi has actually enjoyed widespread popular support for the measure – at least initially. Certain segments of society continue to be supportive, depending on the degree to which they are actually affected by the ban.
The degree of Modi’s support is presumably inversely proportional to the length of time spent in such queues.
After two weeks of increasing chaos and ample demonstrations of government ineptitude, the political opposition has finally decided to join the fray and is now beginning to forcefully denounce the measure.
Parliament was adjourned after an “uproar” over the currency ban, the opposition is organizing an “all India protest” for November 28, as it is now united in opposing the ban. Moreover, allegations that the plan was leaked to certain people in advance have surfaced (that wouldn’t surprise us one bit).
As Jayant has rightly pointed out in the third part of his articles on the currency ban, the evolving situation is forcing the government to continually issue new ad hoc decrees in order to stop people from successfully fighting the edict.
Similar to the attempts of the post-revolutionary assembly of France to defend the assignat in the late 18th century, it is resorting to increasingly repressive steps (the most recent one is that it has apparently suddenly shortened the grace period for banknote exchanges, concurrently with announcing that it will impose a tax penalty on “too large” deposits).
This has led to speculation that gold may be in the government’s cross hairs next. As the thinking goes, if it can ban certain banknotes, surely it can also enact a ban on gold imports? As an aside, an outright ban on gold ownership seems highly unlikely, as that would probably cause more than just an “uproar”.
Banning gold ownership is out of the question.
Also, some of the largest gold hoards are held by temples – in other words, the country’s religious establishment would undoubtedly be less than amused.
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And so, clearly seeking to calm these fears, a top finance ministry source said on Friday that the government is not considering any proposal to restrict holdings of gold by individuals. As The India Times reports, following the demonetisation of 500 and 1,000 rupee notes in a bid to crack down on black money, there were apprehensions among people that the government might impose some kind of restrictions on gold holding by individuals.
"There is no such proposal before the government on restricting domestic gold holding," the source said.
There were reports that many people have converted their black money into gold following the announcement of demonetisation of high denomination currency notes by Prime Minister Narendra Modi on November 8.
Of course, we note that there was no official denial of any proposals to impose a gold import ban.