Indians simply adore gold! Brides are decked all over in gold. Many astrologers and priests sport rings in all their fingers, and there are business tycoons who offer gold to temples in return for redemption!
Indians splurge on this yellow metal. In 2011, India imported 1000 tonnes of gold, a fifth of global annual supply. Why do Indians love gold?
Even when tradition can be cited as a reason for this craze for gold, the vast purchase of gold seems to be only in recent times.
In 1982, India consumed only 65 tonnes of gold. Until 1990 import of gold did not exist. Bullion was smuggled in and its price in India was 50% more than in other countries! Then, the typical buyer was a poor farmer for whom gold was a collateral to borrow against in bad times.
However, today gold is bought by rich people, serious investors and speculators. Then crooks imported gold, and pawn brokers made loan against it. Today, gold enters India legally through banks.
Gold buyers are being rational. Most importantly, they understand that the formal financial system in India does not do them much favour. Consumer price inflation is much higher than the interest rates and government bond yields. The financial system helps government to borrow cheaply at the expense of savers. Faced with few options, the yellow metal lures buyers, given its increasing value year after year.
Second reason for the popularity of gold is that it allows you to pass through quite a lot of red tape. Gold is widely accepted without documentation. It is a fine way to store wealth without having to pay tax.
Gold craze makes sense at the individual level, but in aggregate it is a disaster for India. Now, the government has imposed quotas and high duties on gold imports. This has paved way for bootleggers to smuggle gold into India!
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