S Gurumurthy

Gold: Economists need to change

S GURUMURTHY | Updated on March 12, 2018 Published on October 17, 2013

Age-old embrace: In India, the bride is first married to gold, then to the groom.

The US is wedded to stocks and India to gold. India’s policymakers would be wrong to believe that they can break an age-old tradition.

Macro economists in India perceive gold as a wasteful asset and as the villain of the Indian economy.

But gold has repeatedly emerged as the winner against economists, confounded their theories and perplexed them. ( >Gold: villain or saviour? Business Line, October 4, 2013). The unwavering Indian attitude to gold through history should persuade our economists to rethink their views on gold, particularly in the case of India.

Theories of economics which the world had trusted for the last few decades are in state of flux ( The Economist, July 8, 2009). Bradford Delong, a respected economist, said that the discipline of economics itself is in crisis ( Economic Times, May 12, 2011).

In its >editorial on the 2013 Nobel Prize winners Eugene F. Fama and Robert J. Shiller, who hold divergent views on asset price economics, Business Line rightly observed that “It is a reminder that economics, which is about human behaviour, is not an exact science and hence not governed by immutable laws.”

The assertion of economists that economic laws are universal in their application has been heavily questioned by the 2008 meltdown.

If economic laws are not immutable, why should the economic theories on gold alone be regarded as immutable? Gold obeys economists in the West. But in India it does not. Why?

Gold rush of the West

The role that gold plays in Western economics — it plays no role in western society — is vastly different from the role it plays in Indian society and economy.

In India, the bride is first married to gold, then to the bridegroom. Even the poorest of the poor buys gold for marriage, and every Indian home has a full sovereign or half.

Indians of all religious persuasions propitiate and decorate their Gods and temples with gold — be it the Tirupati Temple or Golden Temple, or the Jam’at-Khanah mosque in Agra, or Namdrolling Buddhist Monastery Karnataka or the Jain Temples at Ajmer or Falna.

There is no distinction of caste or religion in gold habits. It does not need a historian to say that India’s hostile policies on gold have not yielded results.

And it does not need a seer to confirm that gold in India cannot be handled on western paradigm on gold, particularly the US. See the difference between the history and paradigm of gold in the West and in India.

While gold was the greatest attraction for all nations and peoples, the Westerners fought wars and killed thousands in mad pursuit of gold. The infamous California Gold Rush, which began on January 24, 1848, brought some 300,000 people to California from the rest of the US and the world. It was marked by duels, murders in broad daylight, public hangings and jail breakouts.

Thousands of Californian Indians were killed in the war to loot and defend gold. The gold in the West was always asset of the mighty elites, rulers and buccaneers. It was not the pursuit or possession of the ordinary Westerner.

Through trade, culture

Even as the pursuit of gold by the West was marked by crime, Indians, in contrast, earned every ounce of their gold stocks through trade.

They stocked gold and preserved it for generations through millennia as not just an asset but as sacred inheritance — as Lakshmi, the Goddess of Wealth.

See how Indians earned gold — very little of which India ever produced. Rajeev H Dehejia and Vivek H Dehejia say in their research titled “Religion and economic activity in India: Historical perspective” ( American Journal of Economics and Sociology, April 1993) that the Mauryan empire (325-185 BCE) built wealth by export-led growth model like contemporary newly industrialised countries.

The authors cited evidence of how the booming export trade was found in the records of the Roman Senate where Pliny, a historian and writer, and the Emperor Tiberius complained about the huge drain of Roman gold to India.

Marco Polo’s travelogue also speaks about huge gold stocks of India in the 13th century.

A more recent Bank of International Settlement Annual Report of 1934-35 says that India’s gold absorption was 14 per cent world’s gold supplies during the period 1493 to 1930. That is, for four centuries India must have run 14 per cent of the world’s trade surplus.

Researches of Paul Bairoch (1983) and Angus Maddison (2001), which proved that for almost 16 of the 17 centuries, India ranked world first in GDP and for two centuries India was second only to China, corroborated the historic records.

India’s gold stock, estimated at 20,000 tonnes on the lowest side and 40,000 tonnes on the higher side, was built by trade and culture — not by war or bloodshed. And a large part of this gold stock — estimated at 70 per cent — is with the ordinary people in villages.

Here is an interesting comparison of the recent history of gold in US and India. In the wake of the Great Depression of 1930s, US President Franklin Roosevelt outlawed private possession of gold in 1936, nationalised gold and turned into a state asset.

The US later built gold stocks of over 20,000 tonnes by 1950. It is that huge gold stock which made the US a global economic power when the Bretton Woods meet accepted the US gold-backed Dollar as global reserve currency.

While the coercive state turned gold into a state asset, with the gold proscribed in 1936, Americans took to banks and property to invest their savings.

When private possession of gold was allowed in the US in 1976, people who had picked up stock habits, had forgotten gold.

The share of stocks in household savings in the US rose from 17 per cent in 1953 to 35 per cent in 1968 and then it fell to 15 per cent in 1974. But when it fell Americans rushed to deposit their monies in banks.

But later the share of stocks picked up and doubled from 17 per cent in 1980 to 34 per cent in 1998. The equity index rose by ten times between 1980 and 1998. So did the real estate index. The share of real estate in US households rose from $2.5 trillion in 1980 to $12 trillion in 1998 and stocks from $3 trillion to $14 trillion — the two accounting for 2/3 of the total savings. [Milken Institute Policy Brief June 2002].

By 1998, 58 per cent of US households had held stocks. It rose to 67 per cent in 2002.

Gold as savings

But in India, the picture is very different. Indian rulers tried the US model in India when they virtually began war against gold, particularly from 1960s, and almost proscribed private gold.

But the Indian state failed where the US government succeeded, why? Because gold in India was as much a cultural phenomenon as an economic asset. In the US it was just an issue of economics.

According to Central Statistical Organisation (CSO) gold and real estate is two thirds of the total households savings, which accounts for over 72 per cent of domestic savings. But only a fraction of household savings gets into stocks. This is despite tax breaks for investment in stocks and despite the stock index rising by four times since 2001. Only 3 per cent of household savings gets into stocks.

As rightly observed by Aseem Chawla, Partner, MPC Legal ( Business Line, March 1, 2013), >Indians are creatures of habits; they save a third of their earning — a phenomenon probably explained by “our cultural values rooted in conservatism” and household savings which constitute large chunk of national savings are normally invested in “safe yet non-productive investments like gold.”

While gold is just 3 per cent of the household savings in the West, it is estimated at over a third of the savings in India.

Here is an interesting (but unpublished) study which shows that there is no difference between illiterate villagers and educated savers in how they view gold or stocks.

P. Kanagasabapathi, an academic with Indian perspective, conducted three studies in Coimbatore regarding the saving/investment preferences of (i) teachers and doctors (ii) businessmen, professionals and bank officials (iii) women academicians specialised in and teaching finance related courses in reputed colleges for the commerce and management students.

The studies show that, of the ten investment options given, after bank deposits and post-office instruments, gold was the third with 30 per cent opting for it. Stocks come last out of the ten investment options and chit funds came ahead of stocks and bonds.

This Coimbatore study result matches with the analysis in Global Economic Paper No 187 of Goldman Sachs (October 2010) which also said that only 6 per cent of Indian savings get into stocks.

Kanagasabapathi’s study showed that finance professors pontificate to the students in the class not to buy gold but invest in stocks, but in the evening they are themselves in Thangamaligai — precisely like our ministers, and even economic writers, do!

Indians not just love gold. They revere it. Their reverence for gold manifests itself during Danteras and Akshaya Tritiya — the auspicious days for buying gold.

The lesson: economics cannot change people. It has to change itself.

(The author is a commentator on political and economic affairs, and a corporate advisor)

Published on October 17, 2013
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