India hopes to wean citizens from gold
By Anand Giridharadas International Herald Tribune
Wednesday, March 16, 2005
MUMBAI, India The Indian government is placing a long-range wager that an increasingly prosperous population can be coaxed to part - at least physically - with its boundless hoards of gold.
A policy floated recently would allow Indians to buy virtual, or "paper," gold in denominations as low as $2, instead of investing in necklaces, bangles and coins. It is a step, analysts say, toward bringing millions of poor Indians into the banking system and unlocking the untapped investment potential of more than $200 billion worth of privately held gold in India.
Indians are the world's biggest gold consumers, with more than half the country's savings tied up in physical assets. Particularly among the very poorest, Indians are prone to spending much of their income to acquire the metal, locking up their assets in the resulting hoards.
Economists say such a high rate of hoarding constrains the Indian economy, which is short of capital.
The economy is projected to grow into the world's third largest, after the United States and China, by 2040.
Details of the program, disclosed in four brief sentences in the government's budget speech late last month, are still under discussion.
But the basic proposal is for funds traded on gold exchanges that allow "gold units" to be bought and sold without physical possession - much like buying shares in Coca-Cola without having to stash the beverage at home.
Initially, the metal itself would be retained by the bank, as the seller of a paper gold certificate, and the buyer could at any time trade in the paper to receive the current market value of the quantity of gold originally bought - not just the amount of money originally spent.
The long-range vision, experts say, is to put the value of the gold to work, perhaps by allowing banks to "sublet" gold deposits, just as they lend out deposited cash. Doing so could inject more capital into the economy than top multinationals have done: Indians last year poured about twice as much money into gold - about $10 billion - as foreign direct investors poured into India.
Equally, paper gold could make shareholders of the 700 million village dwellers who, though starkly poor, purchase about two-thirds of India's gold.
"They are exposed to only traditional ways of investing," said Pankaj Razdan, managing director of Prudential ICICI Mutual Fund. "This would be a different way of getting them to participate in capital market."
Gold has long been a last line of defense for Indian households, a hedge against pensions' evaporating, ventures' folding, prices' inflating and children's emigrating.
Now the government appears to be betting that, after 14 years of reforms and prolonged economic growth, growing numbers of Indians are crossing a confidence threshold that renders the hoarding of gold outmoded.
"It's probably as significant a measure of what's going on behind the reforms as any," said Peter Bernstein, the author of "The Power of Gold: The History of an Obsession."
"If people are really beginning to transfer from gold to financial assets, that's a tremendous vote of confidence in the reforms."
Indeed, paper gold could serve as a referendum on whether reform has released Indians from a once-paralyzing fear of the future.
"In the past, our mental model of money was that of a stagnant pool that always needed to be protected - from evaporation, leakage and reckless use," wrote Santosh Desai, an advertising executive, in an essay in the local magazine The Week.
"This is the first generation that sees tomorrow as being better than yesterday, and this fundamental change has transformed the way in which we see money," wrote Desai, who is the president of McCann Erickson India.
"From being fearful hoarders of money, we are today willing to be energized by the continuous flow of money in our lives."
But is this, the world's most gold-gulping nation ready to part, even just physically, with its gold?
Don't bet your bangles on it.
"What is the reason I'm buying gold?" said Pinank Mehta, an asset manager. "The reason for my purchase is a lack of trust in the present institutions. Now why would I buy physical gold and give it back to the same guys who are the cause of my not trusting the present system?"
The government can hope that growing numbers of Indians will abandon that view. Nevertheless, interviews with policy makers, gold traders, jewelers and consumers suggest that Indians retain a cultural need to touch and feel their yellow metal.
Analysts say that for affluent families, paper gold might simply become an additional investment vehicle.
"I possess about half a dozen single gold earrings," wrote Natasha Ramarathnam, a Delhi mother, in an e-mail. "When I lose one of a pair, I put the survivor away and get a new one. But never throw it out, as I would a silver one, or exchange it at the shop."
"When you buy gold," she wrote, "you buy it for life, and never think of selling it."
A group of migrant workers, emerging from a garment factory in Mumbai, said they would embrace a mechanism to bypass money lenders, who, when converting their gold to cash, physically slice off 10 percent as a fee.
"If there is an emergency or some need arises, you can sell it back. But it gets cut, and so it's discounted," said Dinanath Kanojaya, a migrant from Uttar Pradesh state.
A virtual-gold system could also expand much-needed rural credit: The poor could gradually put cash into paper gold, and then take out more affordable loans from government banks with paper gold as backing, said Sanjeev Agarwal of the World Gold Council.
Still, few expect physical gold to make an exit. Some say that gold, along with cricket and hot tea, is what makes Indians Indian.
Gold is an established feature of Hindu mythology and festivals. The word "gold" has seven synonyms in Sanskrit. Ancient Indian healers believed in gold's powers to improve blood flow. It remains the preeminent status symbol for women rich and poor.
Some attribute India's attachment to gold to a long history of turbulence: millennia of foreign invasions, rising and falling empires, political consolidations and disintegrations and avaricious governments.
Gold is also, many say, the surest way to keep money safe, both from the reach of thieves and the gaze of the tax man.
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