It all starts with India not having gold mines.
3000 tons annual world production, India close to zero.
But Indians buy 800 tons of gold annually.
Which is a huge loss of foreign exchange. At current prices, hundred billion dollars annually.
So the government has a problem. How to reduce the foreign exchange outflow?
Remove the Indians' love for gold, says one economic advisor! Make them love other things! Ha ha! Easier said than done. Love of gold is congenital, embedded deep in our genes.
Educate them, says another advisor. About how gold is an unproductive asset, about how it does not contribute to national development, about how holding gold is unpatriotic! Problem is, Indians are not prone to receiving education, like presumably the Chinese are. Indians don't listen to governments, they pretty much do what they want.
Ban gold imports ! Ah, the ideal bureaucratic solution! But unfortunately, gold is very high value packed in a very low volume. Every Indian coming from abroad decks himself in gold. Gold still somehow manages to find its way in somehow, even if shoved up people's large intestines.
Ok, how about levying a customs duty? It will reduce imports, reduce consumption, make Indians more patriotic! Bad idea. Like we know after watching so many Hindi movies, the smuggler sitting in his underground adda stirs into action. Every dingy, every ship, every plane has gold stowed away inside, and India still manages to get its due share.
There is a further problem when gold gets smuggled in in such large quantities. It's an entire black economy that is created because of the arbitrage. 12 percent duty being evaded effectively means 12 lakh rupees profit for every kg of gold at today's prices, evaded money, evasive money, that gives rise to a huge, black, money laundering economy. Why do you think there are so many jewellers from Kerala opening multi storeyed showrooms in every city?
And how do the smugglers send money out of the country to pay for all that gold? Some of it may go out as cash, but a lot of it goes out as a reverse flow of goods. Other goods. Like drugs. What enters from the golden triangle or golden crescent exits from the docks of Mumbai or Cochin, cutting a huge swathe of destruction across the country in the process.
So duties don't work, the finance minister has to roll them back.
So what next? What to do? Every government, every finance minister, every central banker, hates gold. For it is the one thing that takes away their power, the crazy illusory power that fiat money bestows. If left to them, they would make owning gold illegal. They tried that, in several countries across the world, including India and the US, but it didn't work.
So now what to do? New finance minister, new scheme. Sovereign Gold Bonds! Give the public a piece of paper linked to the price of gold! No forex outflow! The public doesn't bite so sweeten the deal with an additional 2.5 percent per annum! Very very ill advised. The government ended up giving IOU's based on a commodity it has no control over. Just ten years, and they realised their folly. The government faces a big fat redemption bill. No more IOUs, scheme closed.
In the meanwhile, Indians continue to consume gold happily. All of 800 tons a year. And we can explore all we want, we will even strike oil, but no gold. Dev Bhoomi we may be, but Swarna Bhoomi we are not.
Indians are smart that way. They know what is good for them. They continue to buy gold, lots of it.
Mera Bharat Mahaan...
