POLITICAL ECONOMY

Gold rush in India? Government steps in again

In a bid to control prices and food inflation, the Indian government is set to unveil a roadmap to stimulate investments into financial instruments, away from gold.

Author: Shivom Seth
Posted: Wednesday , 08 Aug 2012

MUMBAI (MINEWEB) - 

The Indian government is at it again. Worried that the flow of savings is moving towards investment in gold, India's Finance Minister P Chidambaram has said there is a need to spread financial literacy to encourage people to invest in market instruments and not bullion.

This was followed by the Prime Minister, Manmohan Singh, laying down policy decisions to direct the shift of investment towards insurance and mutual fund schemes.

In the first two months of 2012, gold purchases in India jumped 35%, impacting investments in other instruments like the stock market, mutual funds and property. The government has said it would prefer savings to be invested in ``more productive assets'' that would help boost the growth rate.

Unveiling a broad roadmap for putting the Indian economy back on a high growth path and regaining the confidence of investors, the Finance Minister has promised steps to achieve fiscal consolidation, price stability and stimulate investment.

"In 2007-08, savings touched 36% of GDP. It is now down to 32% of GDP. One of the reasons may be a perceived lack of attractive investment opportunities and instruments. Hence the attraction of gold, but gold is not a productive asset and the demand for gold worsens the current account deficit. Both the mutual fund industry and the insurance sector have turned sluggish. In the next few weeks, we will announce a number of decisions to attract more people to invest in mutual funds, insurance policies and other well-designed instruments,'' the Finance Minister said.

Earlier, the Minister had said, ``The time is ripe to motivate our educated upper middle-class to climb from savings mode to wealth generation mode.''

The Minister said he intended to unveil shortly a path of fiscal consolidation. ``I would like to make it clear that the burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders. The poor must be protected and others must bear their fair share of the burden,'' he added.

As part of its plan to wean investors away from gold to other financial instruments, life insurance policies and mutual funds are set to get more attractive in India with a range of tax breaks in the offing.

At present, investment in life insurance policies is part of the $1,814 (Rs 100,000) tax exemption limit for individuals. In addition, there are tax breaks on health insurance premiums of up to $272.10 (Rs 15,000) a year. Analysts say this limit could well be eased to ensure more savings flow.

India's fascination for gold has dented the stock market. An analyst with a broking house confirmed that investment in gold has been trending upwards in India for some time, while investments in the stock market have fallen sharply.

Data compiled by Thomson Reuters also suggests that funds that invest in gold have been outperforming most other investment instruments.

Chirag Mehta, fund manager at Quantum Gold Fund however notes, ``Given the current economic backdrop, where governments are struggling with problems like rising deficits and unsustainable debts, it is indeed logical for gold prices to increase in value. With policy makers continuously debasing currencies, gold will be viewed as a preferred investment, lending some solace to investors.''

Adds another analyst at HDFC bank, ``The Finance Minister has urged financial analysts and experts to create confidence in the market, spread financial literacy as well as merit of investment. He is right. One needs to put investors interest in the forefront. For if we lose the interest of potential investors, the growth process will be stalled. This month marks the beginning of investment in India's manufacturing sector. Let's see if the direction of savings veers away from gold.'