India is the biggest importer of gold. Every year 2500 ton of gold comes out of the mines across the globe and 40% of it is purchased by the Indians. Investors of the world are dumping gold, but Indians are buying more and more. With the price falling demand is also increasing in the country. Gold is doing nothing good for the Indian economy Indians are so gold crazy they’re sacrificing their currency and their country’s economy in the bargain.
Let us understand why gold is bad investment for our economy
Increases current account deficit (CAD)
We don’t produce gold in our country its imported from other countries. India has to pay for its gold imports using its foreign exchange reserves. Foreign exchange reserves hold a key, especially for the developing countries like India. We have to import crude oil, industrial metals, defense equipment etc These things are important and we can’t stop importing them in any situation. Spending foreign reserves on up productive assets like gold reduces the forex reserves for other important commodities like oil. Imagine what will happen if we run out of forex reserves and can’t buy oil, industrial metals, and defense equipment.
Our former finance minister P Chidambaram therefore made appeal to the people of India ” If for one year there are no gold imports, it will change the current account deficit story of the country, I once again appeal to everyone to resist the temptation to buy gold”
Makes Rupee weak against dollar
Dollar is a global currency and we have to pay in dollar for all the imports we do. By buying up billions of dollars worth of foreign gold, we are sending Indian cash overseas. As more money leaves the country rupee becomes more and more weak. Weak rupee against other currencies makes all essential imports costly. This adds to inflation and we have to pay more for everything. If gold imports start to fall, the government will have enough dollars to shore up the rupee.
Makes economy unstable
Rising deficit is bad for India as it exposes the economy to the risk of sudden stop and reversal of capital flows. In case of an event shock, for example if the U.S. Fed withdraws its bond buying programme, there might be sudden outward flow of money, leaving India scrambling for dollars. The slowdown in the Indian economy has made the current situation even more volatile because the government is unable to generate heavy capital inflows.
Increases import bill
Gold is India’s second most expensive import after crude oil. Crude is a necessary thing which we can’t stop buying. Our whole transport system, and many industries depend on crude. It’s the life line. But gold has no use it is a drain on resources. The government has to spend precious foreign exchange for a commodity that is of least use.
Blocks the capital
Indians have for centuries relied on gold for savings. The amount of capital that goes into gold saving is very big. Large amounts of savings locked up in gold curtail liquidity. This amount could be used in the growth of the country. When you deposit money in the bank, banks lend it to industries and other people which they use in their growth and repay it to the bank with interest. It increases the cash flow. When you buy a home or invest in a property you generate income from that. When you invest in shares, the company can use your money in its growth and apprication in the share price increases the wealth of investors also. But when you buy gold it remain in your home idle and generates no cash flow. It does good neither to you nor to the nation.
We don’t say that people of India should completely stop buying gold because a lot of people depend on gold for their livelihood. Jewelry sector provides employment also to many people. But gold do more bad than good. Slowing down of gold import will help to strengthen the economy of the country and it will benefit every citizen of the country.
Abhishek is an Engineer MBA in Finance and Certified Research Analyst. He is an active trader and investor in the stock market since 20010. Follower of the philosophies of Warren Buffet and Peter Lynch in investing and trend following in trading.