The motive of investment drives much of India’s demand for gold

This is what recent trends indicate. It also makes it easier to compress physical imports by offering gold-linked alternatives

- NIRANJAN RAJADHYAKSHA

“In prosperity, as in the hour of need, the thoughts of most Indians turn to gold. And with the steady drain on our foreign exchange reserves for over two years now, we have reached a stage as a nation when the question is being asked whether we could utilize the idle gold hoards of the people to see us through the critical years ahead.

No less person than the Prime Minister voiced this feeling at a recent meeting.” These words were written in 1958 by I.G. Patel, then a senior official in the finance ministry who would rise to become governor of the Reserve Bank of India in 1977.

The Indian appetite for gold is once again in the news. The current Prime Minister has asked citizens to suspend new gold purchases for a year, while the government he heads has increased import duties on the yellow metal in order to take some pressure off India’s balance of payments. India is headed for a third consecutive year with a balance-of-payments deficit. A sharp increase in international oil prices as a result of the West Asian crisis and capital inflows too weak to fund our trade gap have combined to send the rupee down against the US dollar. Gold is the third biggest item in the Indian import bill, after crude oil and electronics. Reduced gold imports because of either moral suasion or higher import taxes could ease some of this pressure on our external balance.