Should Government place curbs on gold imports? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Should Government place curbs on gold imports? A  A  A

24 NOVEMBER 2012

There are some views expressed that the Government should place curbs on imports of gold, which Indians love. If there were no gold imports, India would have a current account surplus, instead of the expected, and untenable, 5% of GDP deficit on the current account. It would be wrong to place curbs.

The reasons why Indians love gold are manifold. Primarily, those living in rural India learnt, after being invaded by Mughals and then the British, that it was best to carry whatever wealth they had on them, in the form of gold or silver jewellery. Banks have not penetrated deep enough, as brick and mortar branches are unviable for small pockets of population.

But consider the alternative financial investments. Equity shares. Bank deposits. Government bonds. Corporate fixed deposits/bonds. Lets see the experience individual investors have in these.

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Stockmarkets investing is never easy. With over 6,000 stocks to choose from, and absence of brokers to service investors in all but the larger cities and towns, getting them to invest in equity is a big ask. The mutual fund route would be better, especially with schemes like SIP (systematic investment plans), but there has been very little work done towards investor education for this. The equity mutual fund industry has shrunk after payment of upfront commissions was banned.

Fixed deposit in banks? Around 70% of banks are in the public sector, majority owned, and controlled, by the Government. The management of these banks, often excellent, has nonetheless to kowtow to pressures of directed lending/investment by the majority owner, the Government. Just last week, the offer of sale of Hindustan Copper by the Government of India, was oversubscribed, at Rs 156, only because of applications from LIC and Public Sector Banks (PSBs), without which it would probably have flopped. The Government desperately needs the inflow from divestment of shares like Hindustan Copper, in order to contain its fiscal deficit at 5.3% of GDP, which it is unlikely to achieve. Now LIC and PSBs should, of course, be free to invest in Hindustan Copper, or wherever, but the decision must be theirs and not instructed.

It is merely in order to make more disinvestment possible before the fiscal year ends in March 2013, that the Government has given a dispensation for LIC, allowing it to hold 30% of a company's equity, against the wishes of the insurance regulator, IRDA.

Now, regulators, such as IRDA (for insurance) or TRAI (for telecom) or Securities and Exchange Board of India (SEBI) (for securities) are appointed in order to use their domain expertise to follow a course of action. Their recommendations should be generally accepted, and overridden only by exception. Yet we find them generally overridden and accepted only by exception. The Government, used to exercising power, is reluctant to let go that prerogative.

Banks, LIC and other organisations within Government control, are directed to use public savings to bail out unviable public sector undertakings (PSUs). Air India is a classic example. Last week, LIC (Rs 3,000 crores) and EPFO, or the Employees Provident Fund, (Rs 4,400 crores) subscribed to the Rs 7,400 crores of 9.08% non convertible debenture issue of Air India. Air India is unviable and survives only because of Government's constant infusion of equity into the company and constant pressure on financial institutions to lend it money.

In other words, LIC has risked money of its customers and EPFO of the employees whose provident fund it manages, only on the assumption that Government will continue bailing Air India out.

The subscription of Air India debentures is based on a promise that the Government would infuse Rs 6,750 crores equity into Air India immediately, and another Rs 23,481 crores up until 2020-21. Thus the Government is pumping in Rs 30,000 crores of tax payers money and asking its institutions to pump in Rs 7,400 crores in debentures, to save an airline. Why?

So the Government can squander taxpayer money, depositor money and savers money in a bottomless pit, but yet wants to curb individuals from opting to invest in gold. That is amazingly poor governance.

It's the same with investing in Government bonds which are issued by a profligate Government that is unable and unwilling to contain its expenditure.

The Finance Minister recently suggested to public sector banks that they bring down deposit interest rates and also lower rates for corporate borrowers! Instead, why not stop directed lending that turns into NPAs over time, and use that to lower lending rates? Why not consider reducing wasteful Government expenditure and appropriating less of public savings through CRR?

Or take corporate bonds/fixed deposits issued by the private sector. There are several pitfalls here as well for the individual investor, and worse, there is no redressal mechanism. Investors who are not paid back their fixed deposits or whose debentures are not redeemed, or interest not paid, are unprotected, and told to fend for themselves through a court of law. That is an interminable process.

So, naturally, individuals find the comfort of gold to their liking. If the Government wants to wean investors away from gold and into investing a part into other financial assets, it must 1. Stop directing where the savings should go 2. Allow independent regulators to function independently 3. Assure protection to them by either speeding up the judicial process or by setting up a parallel process such as investor courts, similar to consumer courts.

But placing curbs on choice is not the right way to go.

The high current account deficit has to be financed through capital flows. Indians working abroad contribute $ 60b. a year through inward remittances, the highest in the world. Foreign investors have, so far in calendar 2012 (Jan-Nov) invested $ 24.2 b. into equities. For fiscal 2012-13 (Apr-Nov) it is $ 10.2 b.

The deficit can also be reduced by curtailing imports, the largest item for which is crude oil. Imports of crude oil have gone up for several reasons. For one, the Government encourages private transport instead of building efficient public transport systems. Just consider the way the automobile has been designed. It is made of steel, which is heavy, so that it can better withstand an accident, especially at high speeds which consumers consider a desirable feature. In their book 'Natural Capitalism', downloadable from, the authors say that, in proportion of weights of the car and the passenger, less than 5% of the energy contained in the fuel is used to move the passenger, which is the objective. The rest moves the automobile or is wasted in conversion of petrol to energy.

Nor has the Government done anything to improve fuel efficiency norms, through legislative mandate. The US did this way back when it got the first OPEC oil shock, introducing CAFE (corporate average fuel efficiency norms). Why not?

Adding to this is the pressure from the fall in gas production from the KG6 basin by Reliance Industries. RIL now wants gas prices to be hiked from the $ 4.2/unit determined by the Government and due for revision in 2014. It has agreed to having its accounts and capex audited by the CAG, so perhaps gas production may rise if its plans are cleared and gas prices hiked.

In other corporate news, the two Sahara companies, ordered to repay Rs 24,000 crores it had raised by issuing Optionally Fully Convertible Debentures from 30 million investors, without issuing a prospectus, have filed an appeal to SAT (Securities Appellate Tribunal) against the refusal by SEBI to accept documents. The documents were delivered on the last day, after working hours, in truckloads.

Perhaps Government and Sahara can strike a deal, in which, in return for Sahara's expertise in getting 30 m. investors to invest in its divestment programme, it may agree to reduce the interest payable and to waive penalties!

Last week the BSE-Sensex climbed 197 points to end at 18,506 and the NSE-Nifty gained 52, to end at 5,626. Foreign institutional investors (FIIs) inflows, mentioned above, are propelling the upmove.

The FII led rally is based on hopes that the Government takes further steps on economic reform. However, till December 20th the Government would be busy competing with the opposition with lungs and with allegations, during the winter session of Parliament. This session is also expected to be wasted, like the monsoon session was.

A small contribution can be made towards easing the fiscal deficit by disallowing any compensation to MPs if they do not conduct legislative action and continue to disrupt Parliament. Why should they then get paid? Perhaps someone can file a public interest petition on this.

One cannot expect any further reform action with a filibustered Parliament. Any reform would only be through administrative action, when the session ends on Dec 20. The market would, till then, probably be flat.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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7 Responses to "Should Government place curbs on gold imports?"
Nov 26, 2012
Excellent article, Mr. Mulraj.Kudos for the frank and plain view.
However, no sane politician will appreciate the truth lying in your analysis. you are hitting exposing their motive, the finanacial growth of their family and coteries. swadharma, first 'the self, near and dear' and then only it gets extended to other unconnected people.

However, we should not forget that gold like that of real estate is non productive investment(locked - dead investment) for economic growth,though the individual is benefitted (by it escalating cost).

Why We should think of others (national economic growth)first. Public will follow netas, in wealth accumulation.
Like (1)
lachman massand
Nov 25, 2012
A very thought provoking article. Wish that those in power put at least a few, if not all of your suggestions in operation.Dead elephant like Air India is a big drain and the main reason for it is bad management. Why the public money is being wasted ?It is a parallel case of KFA.
2.You have put up a very practical suggestion that MPs emoluments should be stopped when the Parliament in not allowed to function. Pl. keep up the good job of educating your Subscribers.
Like (1)
Nov 25, 2012
It looks like author assumed - accessibility to equity investment automatically attracts investment. That is only a minor issue. Like (1)
Nov 24, 2012
Nov 24, 2012
Superb article Sir !
GOLD - One of the Element & Metal is Dead asset according to me. Sorry for comment.It is Important asset (Only because of it's quality - LIQUIDITY ..)
Normally Indians do not sell unless it is a must like imergency - Urgent need of money. I think India is the only country in the world having highest Stock of GOLD..
Sorry for the term Dead Asset.
It is up to indivisual to classify it as an most valuable asset. Opinion may vary - Unless the asset is productive one it is of no use except a big risk to hold in the form of ornaments or chips at home....
Hope many will excuse me for my contra opinion .
Like (1)
Nov 24, 2012
Can't help but wonder why Mr. Mulraj would even suggest that the aam aadmi go towards the risky area of equity markets (either directly or thru MFs) . I have seen few who have come out of this market with any serious positive.

Mr. Mulraj, knowing your antipathy for public sector banks, you have omitted to promote the alternative of putting their savings with the private sector banks / other financial institutions.

In a future piece, can you comment on the government's decision to sell family silver (in this case family copper) for very short term considerations.
Like (1)
Nov 24, 2012
Excellent article, as usual, Mr. Mulraj.

However, the demand for gold probable goes back 2000+ years, and the luster is ingrained in our culture & psyche. Use of gold in ornaments & idols are as old as history. May need another millennium to change preferences.

While I would say that gold is just a piece of metal, where collectively the society agrees to give it value. Otherwise, it is totally non productive.

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