India’s gold habit

The country's gold obsession fuels country's parallel financial system

Tarquin Hall

For someone who deals in gold, Sanjiv’s place of business is distinctly unglamorous. A small, stuffy room, it overlooks a noisy, frenetic street in the Shahdara area of Delhi. There is no sign on the door announcing his occupation, nor trade certificate displayed on the walls.

The only clue is the well-used calculator with extra-large keys on his desk, its design practical for fingers burdened by chunky rings. Yet a visit to Sanjiv, or one of thousands of other pawnbrokers across India, is essential for understanding India’s voracious appetite for gold.

“Men in India traditionally own land, property and cattle, and women own gold – it’s as simple as that,” explains Sanjiv. Gold features prominently in the Hindu epics, he explains, seated a few feet from an idol of the Hindu goddess Laxmi, creator of wealth. “A bride is gifted jewelry by her family as part of her dowry. That becomes her security. She will always guard it fiercely. But it has sentimental value too.”

This cultural phenomenon has long worked to the advantage of Indian pawnbrokers, legal or otherwise. For a fee, jewelry can be “booked” – or used as collateral against a cash advance. Such short-term loans are usually sought for months or weeks, terms which banks are generally unwilling or unable to extend. They can also be arranged with little to no paperwork. If broker and client are known to one another, an agreement can be struck within minutes.

The thing about gold is it can never be traced Sanjiv, Delhi pawnbroker

UNDECLARED WEALTH

“It may be that money is needed for an uncle’s kidney transplant or to finance a new business,” says Sanjiv, who profits handsomely from those who default. “Either way, the woman would prefer never to sell her jewelry for fear of losing her security. She would rather pay interest and get her jewelry back once the advance is repaid. That way she can wear it to weddings and other functions.”

No figure is available for the value of the Indian gold-pawning industry, but the Gold Council estimates that Indian households possess 20,000 tons of the precious metal. Some experts consider that figure low, given that last year alone the country imported 975 tons of gold, albeit some for re-export as jewelry.

Indeed, the discovery of $20 billion worth of gold and jewels (including Napoleonic-era coins) beneath the Padmanabhaswamy Temple in the southern state of Kerala highlights the Indian compulsion for squirrelling away undeclared wealth – not to mention their adeptness at hiding it in plain sight.

“Wives do not even tell their own husbands how much jewelry and gold they own, so how is anyone else supposed to find out?” jokes Simi Madan, a Delhi housewife.

Typical of a Punjabi from a middle-income family, Madan owns a hoard of jewelry, the value of which she is unwilling to divulge, citing security concerns. Most of her stash remains in a safe deposit box in the bowels of her local bank; she keeps the rest in a small safe in her bedroom almirah, or cupboard.

If I go outside without a little bit of gold I feel quite naked Simi Madan, Delhi housewife

IN GOLD WE TRUST

Although she describes this collection as being for “everyday use,” it dazzles the eye. There are a dozen gold bangles, multiple sets of earrings, studs, rings and a large gold pendant, which Madan says she wore recently to a ‘Kitty Party’ – a ladies’ lunch at which cards and a lottery game are played. “If I go outside without a little bit of gold I feel quite naked,” she says.

For the government and central bank, the nation’s treasure trove, which remains stashed away in countless other lockers, and no doubt beneath a fair number of mattresses too, represents a tantalizing yet elusive asset. Successive governments have launched initiatives to tap into India’s unofficial gold reserve.

Policy-makers floated gold bonds, launched a gold deposit program and promoted a voluntary disclosure scheme to try and coax undeclared assets from the depths of the “black” economy. None of these initiatives succeeded in breathing life into what India’s new president Pranab Mukherjee – a former finance minister – referred to as a “dead asset.”

Mukherjee and his successors have laid the blame for this failure with the middle classes, accusing them of being stuck in “saving mode” rather than in “wealth generation.” The former deputy governor of the central bank, KC Chakrabarty, has also admonished Indians for buying gold, referring to it as an “obsession.”

Many economists and analysts agree that a change is badly needed. Although the Indian instinct to save is often applauded – households put aside around 30% of total income – land and precious metals remain the first and second choices for savings, with savings accounts and investment schemes a distant third.

“Sixty per cent of the population still don’t have access to bank accounts,” Monika Halan, editor of Mint Money, points out. “To get one, you first need ID proof, which many people don’t have. Often the journey to a bank can be miles; and if you’re illiterate, you can’t fill out the forms yourself. So what do you do if you want to stash away a bit of money? You buy gold.”

That’s a completely rational decision, she argues, and yet somehow people have the impression that Indians are totally irrational when it comes to buying gold. “Yes, a certain amount of gold is needed for weddings. But give people other viable alternatives with healthy returns, and they will opt for them as well.”

Yet, while the investment landscape may appear to have improved in the past 20 years, with banks and brokers offering sophisticated schemes, returns have often proved pitiful. This has driven demand for land and gold ever higher.

“There has been a complete regulatory failure,” says Halan, citing corruption scandals – most notably a Ponzi scheme operated by the Saradha Group. Saradha collapsed in April, causing an estimated loss of up to $6 billion for 1.7 million depositors. “That has broken faith in the markets. Investors have seen that regulators are more interested in protecting companies than consumers,” she added.

THE CAVEATS OF HOARDING

Indeed, the mere mention of Saradha causes Madan to shudder. “So many people I know lost money in the last few years though (the) stock market, shoddy insurance products and wild schemes,” she says. ”I definitely see gold and jewelry as a much safer alternative.”

All this has put pressure on the country’s balance of payments, pushing them to a record of 4.8% of GDP in, this prompted the usually unflappable former finance minister, P Chidambaram to hold a news conference and make a national appeal to stop buying gold.

“People who want to buy gold must realize that every ounce is imported … no gold is manufactured in India,” he said. “You pay rupees, we have to provide the dollars … I would once again appeal to everyone: please resist the temptation to buy gold … it will dramatically change the situation of the current account deficit.”

Import duties as high as 10% have since driven official gold imports down, but also stoked a dramatic increase in smuggling – up 376.5% in the nine months to December, according to the Central Board of Excise and Customs. Hardly a week passes without another report of a thwarted smuggling attempt. In May, a businessman who swallowed 12 gold “biscuits” was stopped at Delhi airport; in April, a woman attempted to enter Mumbai wearing six pairs of underwear stuffed with 2.14 kg of gold jewelry.

According to the Gold Council, law enforcement agencies seized just 1% of all the gold smuggled into the country. A further 150 to 200 tons with a value of $8 to $10 billion entered the market-place illegally. “Gold is a natural asset, you can’t simply wish it away,” says Somasundaram, the World Gold Council’s managing director for India, who, like some south Indians uses only one name. “It’s not an impulse-buy like candy, either. People plan years ahead before purchasing it.”

At no time is that more apparent than around the Hindu festival season in autumn, when Diwali coincides with roughly 10 million marriages. Jewelry shops across the country fill with families who haggle for hours over the prices of bangles, rings and elaborate necklaces and earring sets. This year, Indians are expected to buy around 900 tons of gold. With a population of 1.2 billion people, of whom half under the age of 25, that figure set to rise.

NEEDED ALTERNATIVES

Without gold there can be no wedding Mahesh Gupta

We have a saying: ‘Without gold there can be no wedding’,” explains Mahesh Gupta, owner of the 221-year-old Shri Ram Hari Ram shop in Old Delhi. “If they have the means, they will buy some. Price, import taxes – all these things don’t make so much of (a) difference.”

The question is whether the new government that took office in June will find a way to utilize this considerable, privately- held resource. Rakesh Mani, a columnist on social and economic issues, believes gold exchange-traded funds (ETFs) and gold bonds could still make a difference. “The key will lie in offering a credible set of alternative investment opportunities,” he says, “which would involve strengthening the overall financial infrastructure, lowering transaction costs and improving transparency.”

But pawnbroker Sanjiv sees no end to his flourishing business. “The thing about gold is that it can never be traced,” he says with a grin, his fingers hovering over his calculator. “For that reason, it’s the best investment. No tax, no paperwork – gold is the basis of our financial system.”

India’s gold habit

The country's gold obsession fuels country's parallel financial system

Tarquin Hall

India’s gold habit

The country's gold obsession fuels country's parallel financial system

Tarquin Hall

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