Fascination With Gold Hampering India's Growth Story.

NEW DELHI: The glitter of gold is taking the shine off India's growth story. According to World Gold Council, India's gold imports rose 60% in April-June 2011 from a year ago, as people snapped up the timetested hedge against inflation. India has always been a huge gold consumer, but the yellow metal is now our second-biggest import, behind crude, up from fifth place in 2007-08.

But, this fascination with gold could be a reason why growth seems to be flagging. Money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in bank lockers. "Money spent on gold is mostly wasted because it's only hoarded and simultaneously excluded from the financial inter-mediation system," said Abheek Barua, chief economist, HDFC Bank.

As money has flowed into gold, India's household savings have moved away from productive financial assets, falling to 9.7% of GDP during 2010-11 compared with 12.1% in the previous year. This shift away from financial savings can dent growth, but it's hard to say by exactly how much.

"To the extent there is a shift from household savings in financial assets towards gold, which we know has been happening, it would lead to some loss in the GDP growth," said Indranil Pan, chief economist, Kotak Bank, "although it's hard to gauge the magnitude of the loss." Gold imports are up nearly half a percentage point of the GDP in the last three years, implying that much more of savings is getting locked up in an unproductive asset.

That much of the gold is imported also worsens the current account deficit. The hunger for gold seems to have been triggered by increased risk aversion after the global financial crisis. Surprisingly, the soaring prices of gold, now at three-decade highs haven't driven buyers away.

Of course, national accounts do not consider gold as physical saving - gold imports are considered as consumption - but, as far as buyers are concerned, gold buying has a high savings consideration. "Gold is the preferred form of savings for people and there's nothing one can do about it.

It is, therefore, important to make financial savings more attractive," said C Rangarajan, chairman, Prime Minister's Economic Advisory Council. The fact that India doesn't produce much gold but imports most of the stuff increases leakages from the economy.

"If instead, the same money was spent on other assets like homes, the money would have circulated in the economy," said Sunil Sinha, senior economist with Crisil, a ratings agency. Pronab Sen, member, Planning Commission, agrees with the argument that high gold imports are not good for the economy, but he doesn't feel it is material in the current economic environment. "Since investments aren't really taking off at the moment, to talk about this in terms of inadequate savings isn't necessarily true," Sen said. "This shift to gold could become a problem over time as household savings in productive assets fall, but not right away."

Source : economictimes.indiatimes.com