Managing Gold: Examining India's Gold Rush, Its Causes and Concerns with Suggestions for a Sustainable Gold Policy

Abstract

The paper examines the evolving role of gold in the light of the current gold rush in India despite the worsening financial crisis across the globe and aggressive inflationary conditions. Economically, gold is a lucrative investment that consistently provides high rate of returns, a hedge against inflation in the long term, a store of wealth, a medium of exchange and a standard of currency that makes it an endearing entity. For Indians, there are cultural and religious implications that lead both the rich and the poor alike to the altar of gold. That is why India remains the largest importer and consumer of gold. The paper calls into question this assumption of gold as a ‘safe asset’ in the light of past experience with the backing of economic theory. It proceeds to analyse the present international gold prices, whether it is a sign of a gold bubble and the financial ramifications it has on the Indian economy. The core argument of the paper is that large imports of gold into the economy has negative consequences for house hold savings, external stability, current account deficit and foreign exchange reserves. Besides, there is the ethical argument of holding idle gold in a country where it can be put to better use for developmental purpose. The paper argues that there is a need for integrating gold into the financial and monetary system to augment the productive capacity of the economy. An alternative approach involving demand reduction, supply management and monetisation of gold in a benign inflationary environment is the foundation of a sustainable gold policy.