Nantoo Banerjee
This may, in a way, be the mother of all scams. The Government allowed the country’s gold importers to draw down close to an astronomical sum of US$ 200 billion from the Reserve Bank of India’s foreign exchange reserves between 2009 and 2013 to bring in hundreds of tonnes of gold, the value of which has now eroded by almost $ 60 billion or Rs. 3.3 trillion, making it the biggest and sharpest national loss of wealth. The Government chose to stay nearly unconcerned through the four-year-long bull run in the New York commodity exchange (Comex) and about gold-crazy Indians continuously drawing and depleting RBI’s foreign exchange reserves.
For unknown reasons, India, despite its growing international trade and current account deficits, failed to clamp down on gold imports, facilitating further global price spurt. No commodity or stock boom lasts forever. It was no surprise that the gold price came crushing down in just four days of trading earlier this month. But, the bigger puzzle is yet to be solved. How could such huge amounts of gold enter within such a short span into the country where only 85,000 people boast assessable annual income of only over Rs. 30 lakh each. Who are these importers? Where did they get such large sums from? A $ 200 billion is a lot of money. India is home of one-third of the world’s poor living on less than Rs. 65 per day. Even during the week ended January 11, Mumbai bullion market traders reportedly rushed through imports of as much as 30 tonnes of yellow metal, as compared with an earlier import trend of five to six tonnes a week.
Unfortunately, the gold import scam seems to have slipped out of the radar of the country’s opposition politicians and the civil society who have been laboring to get to the bottom of other scams – 2G spectrum allocation, coalgate, choppergate, black money stashed in foreign banks, etc. – that started unfolding also since 2009. The chances are the world gold price will further tumble. The cash-strapped central bank of Cyprus is likely to dump nearly 14 tonnes of its gold stock in the open market for sale to raise funds to clear a small part of the country’s huge national debt. There are others who may like to quickly off-load their gold hoards to minimize their losses.
If any country is responsible for the lasting gold price boom and its sudden bust, it is India, which accounted for lifting almost a third of the world gold sales in the last four years. It is not the rich Indian gold hoarders alone, the whole nation paid for the unwarranted and undesirable gold rush into the country while the Government did little to restrict the conspicuous consumption by India’s wealthy. The latter’s appetite for gold has led to imports rising from $3.8 billion in 2002-03 to $57.5 billion in 2011-12, taking scarce foreign exchange away from development needs. It is the single largest contributor to the current account deficit woes. A return to gold control of a workable kind was most imperative. But, the Government, which always talks about inclusive growth and improving the lot of the poor, did not probably want to offend the rich, the biggest beneficiary of its economic reform.
Logically, there was no reason for such panic import of gold by India’s rich. There was no indication of a possibility of a third world war coming too soon. Nor, was there a possible threat of nuclear war to India from Pakistan or China over nagging territorial disputes. There was no credible information regarding the possibility of a massive crop failure, a famine, a fuel crisis, a runaway inflation or big devaluation of the Indian currency, Rupee. Usually, gold demand and prices shoot up in the event of war, famine or high inflation. India’s inflation rate has been high since 2007, but it is still far below the levels experienced in the 1970s and 1980s. The commercial lending rates of banks were as high as 18-22 per cent in the 1980s as against the present range of 10-14 per cent. They couldn’t justify such large import of gold, almost a dead asset, which becomes active only under grave economic crisis conditions.
One explanation behind sudden global gold hunt by rich Indians since 2009 could be a kind of sinking feeling or a sense of panic that pervaded the atmosphere after the exposure of a series of large financial scandals at home beginning with lavish Delhi Commonwealth Games spending, private telecom service operators making a killing out of the 2G spectrum allocation, alleged business-politician nexus cornering nearly 70 coal blocks cheaply, continuing large kickbacks in defence procurement and growing noise from the international community, such as Washington DC-based Global Integrity, financial intelligence collector KPMG, Swedish groups and German Government, about India’s massive black money hoard in Swiss banks and tax havens. They may have induced the Indian rich to diversify their black money hoards from illegal foreign bank holding to legal gold hoarding.
The Geneva-based World Gold Council, an epicenter of the global gold trade, maintains a very effective outpost in Mumbai to directly deal with powerful Bombay bullion merchants and high-net-worth individuals. Swiss banks had reportedly offered special locker facilities carrying its secrecy-law protection to Indian gold hoarders. There is no reason to disbelieve that some of the more enterprising gold hoarders haven’t already availed themselves of such facilities. Global bullion speculators made a killing at the cost of rich Indians and also, in a way, RBI, the country’s sole legal foreign exchange custodian. RBI itself purchased 200 tonnes of gold from the International Monetary Fund in the rising market of 2009, the value of which has now substantially depreciated.
RBI’s gold reserves had dropped around 29 per cent in value after this month’s global gold crash. The Central Bank’s current gold reserve stands at 557.75 tonnes. Its value declined from $34.08 billion in September 2011, when the international gold price peaked at $1,900.23 per ounce (28.35 gram), to $24.17 billion early this month as the yellow metal tumbled to its 26-month low at $1,347.95 per ounce. Gold futures for June delivery closed at $1,361 an ounce on the NY Comex, a drop of over $200 in two sessions. Gold’s fall of 13 per cent since April 11 was the biggest two-session decline since 1980. Only two weeks ago, Goldman Sachs warned that the retreat in gold was accelerating after the longest rally in 90 years. (IPA)
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