When Will India Kick Its $200 Bln Gold Habit?

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 Indian rupee, having weakened from about 7.5 to the dollar in 1966 to 49.06 in May 2002, has risen 11.5 percent against the U.S. currency since then.
• India has also liberalized gold imports, reducing smuggling of the metal and rendering anachronistic the plot lines of '70s era Bollywood movies that featured gold-smuggling heavies.

And then suggests several reasons it may be happening:

• Over the past five years, the Indian government has added 16 percentage points of GDP to its public debt and spent 65 percent of the borrowed money on expenditure that doesn't create new capital such as salaries and pensions. That inefficient allocation of savings by the government may have prompted individuals to become more risk averse and stock up on gold, Morgan Stanley's Ahya says.
• According to India's latest census, more than 47 million girls in the age group of 15 to 29 have yet to marry. Assuming 80 percent of them do so in the next five years, that's 38 million weddings. At a very modest 10 grams per wedding, or slightly less than one-third of an ounce, that would translate into 76 metric tons of demand a year, enough to buy a fifth of all gold mined in South Africa last year.

[Bloomberg]