India's government should embrace the infatuation with gold
Pure gold on sale at the post office next to the stamps, the envelopes, the money orders and the postcards.
Most of the 600 or so post offices involved in the first, trial sale of discount gold sold out almost immediately, so it is being expanded to include more of the remaining 155,000 or so offices across the subcontinent.
At the same time the Indian government was engaged in an unprecedented taxation programme to try to stop the import of gold.
The taxes have been levied and increased all year with the most recent duty rising to 10 per cent on all gold imports just two weeks ago. At the same time, less than three months after striking the deal with the World Gold Council, India banned the import of gold coins.
This somewhat schizophrenic approach by two branches of the same government illustrates perfectly the country's peculiar relationship with gold.
Indians cannot get enough of it. It is the country's second biggest import after oil. There are multiple religious festivals devoted to the yellow metal and it is the country's favourite means of storing wealth used by everyone from the richest billionaire in Bangalore to the poorest farmer's wife in Uttar Pradesh.
Demand for gold bars and coins surged by more than 115 per cent in the second quarter of this year to 122 tonnes, far above the global increase of 78 per cent in the same period.
According to the Reserve Bank of India (RBI), the country is the largest gold importer in the world with about US$56 billion worth of the yellow metal coming across borders during the 2011-2012 fiscal year.
On top of that there are about 400 tonnes of scrap gold entering the Indian market every year, worth another $17bn or so at today's prices.
Yet the import of such huge quantities of gold needed to sate India's huge appetite for it, and the inability of the Indian government to properly regulate those imports, has contributed to a record current account deficit that has in turn led to a generational depreciation of the rupee.
India imports far more than it exports - largely because it imports more than 80 per cent of its oil and gas needs and all that gold.
India's current account deficit is at around 4.9 per cent of GDP this year. At $98bn it is third in the world in absolute numbers behind the US with $473bn and the UK with $106bn.
Among emerging economies, India has by far the biggest deficit. Brazil is in second place with $58b at 2.4 per cent of GDP and Indonesia in third with $31bn at 3.3 per cent.
Taxing the import of gold as a key policy in the effort to improve the deficit, meanwhile, has done nothing of the sort.
Arguably, in fact, it has made the problem worse by driving even more capital out of the official banking system into the black economy as more Indians seek to invest in trusty gold through foreign or illegal means as the real economy worsens.
Instead, India should embrace the country's infatuation with gold and bring all those tonnes and tonnes of precious metal that currently reside outside the economy into the fold as currency.
India holds about 20,000 tonnes of gold, according to the World Gold Council - worth close to a trillion dollars at today's prices. Only 558 tonnes is officially held by the Reserve Bank of India, though.
Many veterans of the gold market, including Jeff Rhodes of Kaloti Group, have suggested India establish an official bullion banking system to allow all of that shiny yellow metal recognised as currency alongside the rupee.
Such a move could solve the currency and deficit crisis overnight.
Indeed, the RBI recognises this and has been suggesting the same since 1992.
The plans for a Bullion Corporation of India to perform this role were revived in a discussion paper published earlier this year by the RBI but nothing has been done since.
Gold is a crucial element of the Indian psyche. It is ludicrous that it has become the source of so much economic hardship where with a small change of policy it could become the saviour it ought to be.
Indians have put their faith in gold for thousands of years. It is time their government followed suit.
Updated: August 29, 2013 04:00 AM