Gold-backed Investment Options Mooted to Reduce Gold Imports

The Government is planning to introduce gold-backed schemes such as gold deposits, accumulation plans, gold-linked accounts, and pension products to reduce the direct demand for gold in the market place and thus reduce gold imports which, the government thinks, are responsible for a great part of the current account deficit.

The Mid-Year Economic Survey placed before the Parliament reads: “Now gold backed financial instruments in the form of modified gold deposits and gold accumulation plans, besides gold-linked accounts and pension products linked with the precious metal are some measures being considered to reduce the attraction of a direct investment in bullion and jewellery in the domestic market and check a substantial rise in imports,”

Raghuram Rajan, Chief Economic Advisor to the Government of India, while briefing reporters on the Mid-Year Economic Survey, said: “We are worried about gold imports. It is an unproductive instrument. The way to curb holding of gold is to create more attractive financial instruments.”

During 2011-12, India imported 1067 tonnes of gold worth $60 billion.

Traditionally, gold has always been used as a hedge against economic fluctuations; it has been considered the ultimate protection against risk.

Now, in an inflationary economy where investment in savings deposits yields negligible returns and fails to provide at least a cover against inflation, where investment in shares has led to more burnt hands than accidents during Diwali, where investment in other fixed assets is no option in terms of liquidity, where governments across the globe have demonstrated time and again their incompetence to ensure economic stability – let alone growth, and where a citizen is bound to consider the gold in his hands a safer bet than notional gold in the hands of the government, it is doubtful whether the idea mooted by the government – however sound in principle – is likely to be embraced by the people with enthusiasm.

Unfortunately, investors no longer have any confidence in anything but physical gold. We would love to be proved wrong – because we are also worried about the country’s economy and the survival of the small investor.

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