In the latest financial crisis, the place of gold in India's economy has added to its resilience.
Indians put off by high gold prices
The elderly man with cracked farmer's feet and dressed in dirty white pyjamas looks up expectantly as an assistant enters the air-conditioned waiting room of Riddhi-Siddhi -Bullions, the best-known gold trader in Mumbai's Zaveri Bazaar. "Four thousand, two hundred," the assistant shouts, giving the old man a wad of notes worth about US$85 (Dh312) before disappearing into the offices. The old man counts the money, pauses for 30 seconds, stands up and leaves. RiddhiSiddhi, with annual sales of more $1 billion, spans the breadth of India's gold market, doing everything from selling gold coins and bullion to launching sophisticated online bullion trading systems. But it still acts as a pawnbroker for the common man, filling the age-old function of India's village goldsmiths. India's demand for gold surpasses that of any other country. The 774 tonnes of gold that Indians bought last year was more than double the sales in China, the next country in line. "At times of global chaos, Indians fall back on gold to make themselves safe. In India, they say gold is always the midnight currency," says Ashwin Derasari, the assistant manager of the Bombay Bullion -Association, where gold jewellery is melted back and purified into new gold bars. And during the latest financial crisis, gold has proved its resilience. Gaurav Kapur, an economist at ABN Amro in Mumbai, says the place of gold in India's economy adds to its resilience. "The value of gold has increased and that adds to the stability of the system. It's another reason why the credit crunch is still not so much of a problem for India." The Diwali festival, which starts tomorrow, is the most auspicious time for Hindus to buy gold. The jewellery shops in Zaveri Bazaar are already decked out in bright, multicoloured lights to lure buyers. Indian financial institutions including ICICI Bank, -Reliance Money, State Bank of -India, HDFC Bank and Kotak -Mahindra Bank are forcefully marketing their gold coins and bars for the season, as are specialists like -RiddhiSiddhi. Even India's post office has got in on the act, last week launching a joint venture with -Reliance Money and the World Gold Council to sell gold coins through its 100,000 branches. "The real test of the market will be the Diwali week," says Keyur Shah, the associate director at the World Gold Council in Mumbai. "This is the week when the maximum purchases come." As the rest of the world has rushed to the safety of gold, Indians stayed away, put off by high prices. -Demand for gold jewellery in -India fell 47 per cent in the first six months of this year. Buying picked up in August, with India's gold imports shooting up about 45 per cent from last year's 69 tonnes. But there was another lull last month. Debjyoti Chatterjee, of MAPE Admisi Commodity Research, one of Mumbai's leading gold market commentators, predicts a major recovery at Diwali. He believes the gold price in India could go as high as 15,000 rupees (Dh1,107) per 10 grams, helping to tip the world price back towards the $1,030 per ounce record it hit in March. "The gold story is on a bull run," Mr Chatterjee says. "The possibility of gold prices reaching the previous all-time high is not that far off." Gold's place in India's economy is unique. India has amassed a vast stockpile of the metal, estimated at 15,000 tonnes and worth $420bn. That stockpile is growing by about 600 tonnes each year. The Indian fascination with gold is woven into its traditions. Gold is bought to celebrate weddings, the births of children and religious festivals. But it is also the only way for the 500 million Indians who have no access to banking services to store excess earnings against bad times. "For the average Indian, the stock market isn't an option because you need a PAN [personal account number] number, and only six per cent of the population has a PAN number," says Mr Shah. The country's farmers traditionally convert any surplus earnings from the annual harvest into gold. Only more sophisticated city types invest in stocks and shares. But in the past few years, India's farmers have unwittingly hit on one of the world's best-performing investments. India's Sensex stock market index has halved in value since it peaked at about 21,000 on Jan 11, and is now trading just above its value at the start of 2006. Anyone buying gold at the start of 2006, on the other hand, would have almost doubled their money. But the fascination with gold also acts to slow the country's economy. Every time a farmer relies on a gold bangle for his savings, he is depriving India's banks of part of a vast pool of potential deposits. In better banked economies, this pool would underpin loans to businesses and individuals, strengthening economic growth. As far back as the 1992 national budget, India's finance ministry proposed setting up a gold bank. The aim, said YV Reddy, then the deputy governor of the Reserve Bank of India (RBI), in a 1996 speech, was to "deploy them [gold holdings] in a productive manner in the interest of growth and development of the country". In the late 1990s, the State Bank of India launched a gold bond scheme, which would take gold deposits in exchange for fixed interests, but the scheme was ended and the gold reimbursed. SS Tarapore, a former RBI deputy governor, renewed calls for a gold bank in 2003. "There have been efforts in the past to move savings out of gold into other asset classes," Mr Kapur says. The RBI is pushing foreign and state banks to roll out branches in small towns, and microfinance institutions have reached about a quarter of Indians with no bank account. But India's gold industry is also fighting to steer India's middle class; in the past few years, the middle class has been drawn to luxury goods and other savings, but is being lured back to gold. The gold bars and coins launched by the major banks are a part of this drive. So, too, are exchange traded funds, which give investors exposure to the gold price through owning a security. India has not yet fully felt the force of the global financial crisis - the economy is still almost universally expected to grow at above seven per cent next year. But if it does go through bad times, like the old man in RiddhiSiddhi, it will have its midnight currency to fall back on. email@example.com