India has been among the largest producers and consumers of gold. Therefore at the time of widening current account deficit (CAD), the government cracked the whip on gold imports. Not only the customs duty was raised but gold imports were also subject to restrictions to curb consumption. The 20:80 restrictions made it mandatory for traders and jewellery makers to export 20% of the gold imported. This led to higher cost of operations for domestic jewelry companies. However it has not done much in weaning away Indians from gold. On the other hand, gold smuggling became more rampant in the country. With CAD reaching more benign levels, the government has withdrawn the 20:80 restrictions on gold imports.
What is the reason behind India's undying love for the yellow metal?
Gold is an asset of the last resort. During exceptional times such as war or economic/ political upheaval, when other asset classes lose their value, gold continues to hold on to it. Therefore gold becomes a coveted asset in such times. But the gold attraction for Indians extends beyond these extraordinary times. And this is partly on account of the deficit of trust in the investment avenues available. Moreover Ponzi schemes such as the Saradha scam have further eroded their faith. Therefore instead of penalizing countrymen for investing in gold, the government should create more safe, profitable and reliable investment products. This in turn can reduce the voracious appetite for the yellow metal. The government's ambitious financial inclusion programme Jan Dhan Yojana is the step in that direction.
It is true that gold is not a productive asset and does not earn returns. However with the mindless money printing game going around the world, the importance of gold as a safe haven has all the more increased. As India recovers from the throes of economic slowdown, it makes sense investing in sectors that hold growth potential. But with global recovery still fraught with uncertainty, one should not totally rule out investment in gold.