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When Will India Kick Its $200 Bln Gold Habit?

Aug. 02, 2005 5:02 PM ETSPDR® Gold Shares ETF (GLD)
Andy Mukherjee profile picture
Andy Mukherjee

If John Maynard Keynes were alive today, he would be horrified to see gold rallying again, and for a reason very familiar to the British economist: India's "ruinous" love of the "barbaric relic." Almost 100 years after Keynes used those words to chide India for its extravagance, the billion-people nation shows no signs of losing its fondness for the metal. India accounts for 18 percent of world demand, more than any other country, writes Andy Mukherjee of Bloomberg.

Three out of four traders, investors and analysts in Bloomberg's latest weekly survey advised buying gold.

What's surprising to modern economists is that gold demand in India is on the rise when most of the traditional reasons for hoarding the metal -- high inflation, persistent rupee depreciation, rapacious taxation and low penetration of banking services -- are fading.

With increasing modernization and urbanization in the nation, the proportion of gold in the bridal trousseau should also have been on the wane. However, India's gold consumption rose 57 percent from a year earlier in the 12 months ended March 31, on top of a 63 percent jump in the previous year.

Andy cites several reasons this should not be occuring:

  • Indians are no longer living in the 1970s when they were hard-pressed to protect their savings. Inflation averaged 9 percent a year then, and the income tax rate was as high as 97.75 percent in 1974. Gold jewelry was a handy option to store wealth and hide it from the state. It was also a smart investment: Gold prices rose more than eightfold between September 1976 and January 1981, when they soared to a record $873.
  • India is now the world's 10th-biggest economy. The top tax rate is a reasonable 30 percent, while local inflation has averaged 5 percent since early 2000.
  • The

This article was written by

Andy Mukherjee profile picture
As one of the two Asia columnists for Bloomberg News, I write 900-word commentary pieces twice or thrice a week on economic and business trends in the Asian region. In every column, my goal is to make sense of a complex issue -- macroeconomic, financial, corporate, labor-related or regulatory -- for a worldwide audience under a tight deadline. My work has been published by newspapers around the world and discussed on blogs. Before I joined Bloomberg's small team of opinion writers in November 2003, I was responsible for reporting on economic trends in Southeast Asia, with particular emphasis on day-to-day coverage of the Singapore economy. Prior to relocating to Singapore in November 2001, I covered the Indian economy and government policy for Bloomberg News, based in New Delhi. I was also instrumental in creating the Bloomberg data screens on Indian economic statistics.

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