You may have heard that India has a long tradition of being a virtual “black hole” for gold: the yellow metal consistently flows into the country, but never leaves. This has been the case not just for as far back as recent memory reaches, but all the way to antiquity. The Ancient Romans quickly found that the gold coins they sent across the Silk Road to India in exchange for the exotic goods of the East never returned in the normal course of commerce.
Just because this situation has persisted throughout the centuries doesn’t mean it is entirely to Indians’ benefit, even with something as valuable and virtuous as gold. The country’s exports simply aren’t great enough to keep the dynamic in balance.
The issuance of a national gold bullion coin is one plan (among many) that leaders in India are proposing to deal with the problem.
India’s government has been exploring a multitude of schemes for solving the country’s problem of burdensome net inflows of gold. (Because gold is a such high-value product and hardly any of it leaves the country, India’s trade deficit has ballooned as gold imports far outweigh the country’s exports.)
While the consistent influx of gold bullion into India doesn’t seem like a bad thing, one must remember that it’s not as if all of this bullion is flowing into government coffers or Treasury reserves. Rather, this gold is being gobbled up by jewelers, housewives, and everyday Indian citizens who are wise to protect their family’s long-term financial security. On the family level, this is just good sense; on a national level (think gross domestic product), however, this places a huge hamper on how the Indian government manages its current account.
It’s a matter of fact that the people of India will likely never disavow their affinity for gold, and rightly so. It plays a central role not only in personal finances but in seasonal festivals, weddings, and celebrations of all kinds.
Thus far, the ideas for how to resolve the ever-widening trade deficit have ranged from nationalizing the vast amounts of gold held in various religious temples as offerings (participation was very limited) to setting up gold mobilization plans that encouraged citizens to either open bank accounts by depositing gold (typically jewelry) or receive interest-bearing Gold Bonds in exchange for their metal. Increased domestic gold mining has even been explored.
Thus far, these kinds of plans (some of which have been attempted periodically over the years) have seen little to no success, as Indians are unwilling to part with their family heirlooms in exchange for a nominal yield.
New Gold Sovereigns
In addition to previous measures, the Modi Administration has announced that it will issue the country’s first gold bullion coins through the India Government Mint beginning in October, just in time for the heart of festival season punctuated by Diwali.
The coins will essentially be British Gold Sovereigns, which circulated throughout India from the time of the British Raj on into the present day. The only difference will be that instead of the profile of the British monarch, the coins will use the Ashok Chakra, the symbol found at the center of the Indian national flag that resembles a flower.
While the government is making use of a realistic policy measure by issuing the India Gold Coins, it remains to be seen whether or not the Indian people will take to the idea. Of the more than 900 metric tonnes of gold that the country imports each year, less than 10% of that demand is made up by coins and bars, which are far more popular in the West.
Buyers may be swayed by the government’s insistence that the coins will carry much lower premiums than gold coins imported from overseas, which generally sell with extreme mark-ups in the Indian market.