Economy, Gold and Equity

Gold is the in thing today as a safe haven for most investors with continuous appreciation for many years as against a negative or negligible return from equities. However in the recent budget the finance minister has introduced a speed breaker in the former story and given an incentive for the later. Of the many changes in the last few months, our Government and Reserve Bank of India have introduced, some major changes like:-

  •  The raising of the Non Resident External (NRE) account deposit rates from 3.5% to 9.5% for Non Resident Indians
  • Foreign Institutional Investors (FII) limit to invest in Indian securities increased from ($)5 billion to $10 billion.
  • The imposing of customs duty, withholding tax etc on gold
  • Introduction of Rajiv Gandhi Equity scheme with eligibility for tax exemption

 The first two moves are to increase the flow of $ into the country by way of borrowings, the third one to curb the import of gold and hence the outflow of $. Why such eagerness to get more $ into the country, and that to at almost 3 times the rate of interest in case of NRE deposits? Isn’t the question very relevant here? When does one borrow more and that too at such high rates?

 Probably we are in a bad shape on the $ reserves front and are short to meet our day to day needs and commitments towards various industrial, petroleum & other necessary imports. So why is gold the target?

  •  Gold is imported into the country by paying dollars. Last year India was the highest importer of gold in the world and do you know the figure? Around $50 billion or Rs. 2.5 lac crores worth of gold was consumed by Indians. Gold as an asset is not productive since it is either consumed as jewellery or is preserved in the safe vault & at times people use gold to park their unaccounted money. Which means that Government uses precious $ reserves (which we are short of) to import it and many amongst us purchase the same out of unaccounted money. So a double whammy for the Government by way of loss of revenues as well the $ reserves.
  •  Besides gold, our generic attitude to buy diesel cars since diesel is a subsidized fuel, cheaper then petrol (basically meant for the poor farmers and the goods transportation industry).  However we too are tempted to save on the running cost, which only means we use subsidy and indirectly depend on charity. To avail of the diesel machine we happily dole out larger bucks to the auto makers. Hence some auto giants are setting up new capacities by spending hundreds of crore only for manufacture of diesel engines. Due to various factors the Government hasn’t done much on this front and we indirectly bear the cost.

 On the other hand the last item, with respect to the exemption for investments in equity, enables productive use of resources within the country as the money is infused into businesses which provide employment and stimulate entrepreneurship and growth in the economy. However in the last few years investors have shunned equities since the volatility has been high and profits have disappeared. Whereas the same markets find enough investments from FII’s, who foresee what we Indians are missing out on, something like the India story of growing young population, internal consumption, minimal dependency on exports etc, which is unique among the global markets. The retail participation in equity mutual funds too have been in line with the above.

 However, if say 25% of the money, which we Indians invest in gold is shifted to the equity markets year on year, it will not only bring down our $ requirements, since the demand for gold will come down but also substantially reduce the dependence on the FII’s to whom we look upon to drive the equities.

 All what we really need to understand is that equity as a asset class is volatile in the short run, since any business has its set of challenges and ups and downs which tapers off with time as businesses matures. Besides businesses are run by human beings who find ways to evolve out of all situations. Gold on the other hand is a dormant metal since it does not produce income, like equity which generates profit or dividend, debt which generates interest and real estate generates rent.

 India is a congregation of citizens like you and me. Ca a citizen of a mortgage ridden country remain rich for long? For ages we have learnt about the optimum utilization of available resources, which we do practice when the resources are personal. So let’s do the amends and help bring the bigger house i.e. our Nation in order, to avoid going the Greece way. The finance minister has given us a direction its now upon us to act.