How does spiral increase in Gold prices effect Indian economy

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Gold is among the three primary imports in India which are Crude oil, cooking oil and Gold of which the first two are vital necessities. There are small things the Government can do to decrease the damage dealt by the massive amounts of gold being imported. As a commodity, gold does not add any real value to the productive capacity of the economy. The fluctuations in the economy affects the gold prices in India. The price of gold was seen to reflect the monetary inflation. Rising inflation often coincides with a booming economy. Rise in gold prices can be attributed to the booming economy.  

India's gold market is driven primarily by consumption and fabrication of the yellow metal.  Both have a significant effect in terms of economic value employment, contribution of foreign exchange earnings, and the trade balance.   

Most of the gold purchased in India is stashed away in lockers, safe boxes or gets converted into jewellery. Those who hold gold are just waiting for it to appreciate so that they can get some income and returns on investment or just hold it even after it appreciates to increase their personal wealth. People want to invest or buy gold to protect themselves from volatility and uncertainty. When inflation rises, value of currency goes down and therefore people tend to hold money in the form of gold.     

In a strong economy, Gold is used as a hedge against inflation. When rates rise investors go for fixed income investments that gives a fixed income return unlike gold which does not carry any such return. So, demand takes back seat with prices remaining flat. 

Following facts related with gold affect the growth of Indian economy:

1. Gold is not a productive asset.

2. India's gold imports are starting to weigh down the economy.

3.  Current account deficit. 

4. Gold locked in temples.

People buying gold do so without keeping in mind the macro- economic ramifications and damage caused to the country's economy, but cannot stop buying gold due to the lack of an alternative investment medium which has the same benefits as gold. The high level of trust in the value of gold that it will always hold some value even if all other forms of wealth like bank balances and flat currency are devaluated or inflated  for whatsoever reason.

Purchasing gold as an investment affects the condition of economy as at least million of Indians are purchasing the metal on the same day for same reason in different parts of India.  

India's passion for gold is not new. However, what has happened over the last few years is that rising gold imports have coincided with a rise in its prices and a weakening of Rupee against the Dollar. The combined impact has contributed to widen the CAD.      


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