Do Not Buy Gold To Save The Rupee!

By Amit Ranjan:

The only time, when Indian Rupee goes up these days, is during the toss. A cruel joke which has turned true and the entire economy has gone for a toss. Rupee’s new found love for newton’s laws of gravitation has led to its free fall. It is sliding incessantly and has touched all time low of 59.98 for a dollar. Economists primarily blame it to our lust for yellow metal.

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We Indians were perhaps the first to find this metal, and ever-since have preserved and cherished it as our status symbol. Whether it be marriage or birth or anniversary; gold ornaments are numero uno in our check list. When Vijay Mallya turned 57, he donated 3 kg gold to Tirupati. Just this Friday, a New Delhi-based professional donated a garland, containing 51 gold coins of Mughal-era worth Rs. 16.28 lakh, to Saibaba temple at Shirdi. We have a singer, whose gold ornaments might weigh more than the gold stocked in a bank’s locker. Our obsession with gold dates back to centuries ago, when we built an entire temple out of gold. Shrines and idols made of gold find elite place in our mythology.

‘It’s my money and I can buy whatever I want to, be it yellow metal or green, why do you care?‘ Sure, it’s your money, but your obsession with gold is instrumental in pulling our country down. While our consumption of gold is swelling year after year, our indigenous reserves for the same is negligible. So we have to import gold to meet our demand. Gold and silver imports rose nearly 90 per cent to $8.4 billion in May. Cumulatively, in April-May the import of precious metals stood at $15.88 billion. As a result, our gross imports overshadow our exports. We need not be an economist to understand that if a farmer consumes more than what he produces, he will run in debt. The same is true for Indian Economy. This is termed as Current Account Deficit (CAD), which is the difference between the outflow and inflow of foreign currency. CAD is estimated to be around 5 per cent of the GDP in 2012-13 fiscal.

To view this current downfall of Indian currency as a tragic aberration is to forget the grim history of Indian Economy. This problem is not new. Our failure to address this problem has led to this virtual collapse. Our Finance Minister says “I would once again appeal to everyone, please resist the temptation to buy gold… If I have one wish which the people of India can fulfill, it’s – don’t buy gold.

It’s good to know that he has finally identified the problem, but his helplessness and inaction won’t cut much ice. He in particular and governments in general have either failed or have never tried to know the root cause. The appreciation in gold is much more than interests provided by various saving schemes or dividend paid by mutual funds. Hence, purchasing gold is still a lucrative investment. The biggest problem with gold is that it is a ‘dead‘ capital. Gold ornaments kept in lockers are the potential investments which are never made. Adding insult to injury, many gold loan schemes have made it easier for people to get liquid money in lieu of gold. I would expect Finance Minister of my country to share greater responsibility for this economic catastrophe and take remedial actions so as to incentivise investment and saving schemes.

‘Indian economy is sinking, rupee is sliding. But I don’t give a damn.’ Exactly. Why should you care, unless it affects you? It will not affect you unless you are a student, a daily commuter, an office goer, a retail consumer, a bulk supplier,a vegetarian or a non-vegetarian. In short, as long as you live, you care. It affects us all in one way or the other. These are following flip sides of sliding rupee.

1)Education: If you are planning to go abroad for your studies, you might as well re-think, because foreign education will be costlier with strengthening dollar. While you earn in rupee or the education loan that you take is in rupee, your institute would charge you in dollars. Hence be prepared to spend more. Similarly cost of living would also go up.

2)Petrol prices: We extensively depend on imports to meet our requirement for petroleum products. This means that government pays for petrol and diesel in dollars. With dollar getting stronger everyday, we will have to pay more. Hence, petrol will soon be costlier. Every mode of transportation depends on petrol or diesel; hence daily commuter may have to shell out more.

3)Inflation: With transportation cost up, net cost of all consumer products would soar high. Hence consumers will have to spend more for every product and service.

4)Imports: This one is a no-brainer. As we pay our import bills in foreign currency, imported goods like luxury cars or healthcare equipment would cost more. Also, importers would face a stiff decline in their profit margin.

5)Exports: By the same logic, as our export bills are paid in dollars, we would earn more. Exporters are already making fortunes and would continue to do so in short run. But in long run, as every exporter has to import raw material, inflated cost would nullify the increased profit margin. Indigenous products like handicrafts will enjoy super-normal profit for a long term.

6)Investments: Investors would find it profitable to invest in European markets. As a result foreign funds sold shares worth Rs 5,029.80 crore during this week. This implies that foreign investors have withdrawn money from Indian market. Hence acute shortage of capital in Indian economy is inevitable. Sensex dropped for a third week in a row, losing 404 points to end at 18,774.24 on Friday.

But our FM is still hopeful, he believes that money withdrawn has to be invested somewhere and he is optimistic that it would be reinvested in Indian Market, only if he knew that investors won’t wait for rupee to get taller and stronger (boost is what it needs :P)

7)IT Industry: IT industry would make merry, as it mostly deals with clients offshore. IT and consultancy firms would thrive on our misery. Do you still wonder how Infosys affords pay hike when it was running into losses off-late.

So, sliding Rupee affects us all. While we should expect strong fiscal and monetary measures from the government and regulatory authorities, we should contribute our bit to resolve this crisis. We should prefer indigenous products over imported ones. We can’t afford to buy exported goods just to add to our status symbol. If you want a SUV(say), prefer TATA Aria over Volkswagen Tiguan, or go for TATA tea or TATA salt over their foreign counterparts(trust me, TATA has not given me a penny for this endorsement). As far as our obsession with gold is concerned, we need to explore other fruitful alternative investment options, so that we can fill in the void created by withdrawal of foreign funds.

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2 Responses

  1. Raj

    Let me explain in simple terms why one currency falls with respect to another (assuming it is freely traded, as is the INR).

    If you are in a certain country, you need to buy stuff. But you need to buy using that currency’s money, regardless of your nationality. So what do you do? You some how acquire that currency. Eg: If you are an Indian student in the US, your source of income is what your parents in India send you. Your parents earn in INR. But INR is useless in US. So you sell your INRs to purchase $ and spend those $. By doing so you cause the rupee to decline and the $ to become stronger.

    Let’s say the opposite happens. A US company wants to set up its operations in India, where INR is accepted not $. It needs INR but has only $. So it sells $ and buys INR. This causes the $ to weaken with respect to INR, since they are selling $ and buying INR.

    Gold is just one tiny thing. The bigger forces are the FIIs. Deregulate the market and allow them to invest in India. Also allow Indian exporters to export more, since they get paid in $ but need to spend in INR, so they need to sell $ and buy INR. This is far better than the regressive idea of “Be Indian, buy Indian”. We have seen how badly these Indian companies screwed us when they had market dominence during the license-quota raj

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