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India’s love affair with gold is timeless, spanning centuries and millennia. In India, gold was always and still is, much more than just a precious metal. It is a part of the fabric of our culture and an inseparable part of our belief system. Indian households buy gold in marriages; buy them in festivals, and in family celebrations.

Come Dhanteras and Indian households go overboard to buy golden ornaments. Jewellery makers across the country tap the market with all conceivable promotional ideas. Indeed, when one talks about India’s love for gold, one tends to focus on Diwali and the wedding seasons late in the year. Giving gifts of beautiful gold jewellery during these festivals is considered auspicious in India.

The Diwali festival begins with Dhanteras. It marks the beginning of the five day festivities of Diwali. Hindus consider this day to be extremely auspicious to make new purchases, especially gold and silver articles and new utensils. It is believed that new ‘dhan’ (wealth) in the form of precious metal is the sign of good luck. Dhanteras has now come to be known as the most auspicious occasion for buying gold, silver and other metals.

This is reflected in the volume of sales of the yellow metal on the Dhanteras day. According to a rough estimate, jewellers across Maharashtra alone raked in about Rs. 450 crore on Dhanteras day last year, compared to Rs. 325 crore in the previous year. This was despite a long strike in the jewellery market prior to Dhanteras.

The jewellers came up with a bonanza of offers, such as free silver and gold coins, discounts on making charges, free gifts such as mobile phones and washing machines, and lucky draws that include cars and LED televisions to woo customers.

Market analysts are, however, skeptical about the growth of sales of gold ornaments in Dhanteras 2018 because of sharp rise in prices. Gold prices have been rising steadily and touched a six-year high of Rs.  32,625 per 10 gm – the highest level since November 29, 2012 – ten days prior to this year’s Dhanteras. Higher global prices, a pick-up in festive season demand by local jewellers and a weakening rupee lifted gold prices. Weak domestic equity markets also boosted the demand for gold as an alternative investment option.

The surge in prices might affect the sale of gold somewhat this Dhanteras, but Indian households would comfortably remain at the top in terms of gold holding. According to the World Gold Council (WGC) Indian households have the largest private gold holdings in the world, standing at an estimated 24,000 tonnes. That figure surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia. Gold stocks make up nearly half of India’s gross domestic product if the Reserve Bank of India’s 555.7 tonnes stock is added to it. According to an RBI report, ‘The Indian Household Finance Landscape, 2017’, nearly 11% of all family wealth goes into buying the yellow metal.

This preference also means that a large chunk of our private wealth is idle and unavailable for use by the economy. Gold that lies in lockers are useless idle assets that do nothing for a poor and capital-starved economy like ours. It is like people building small reservoirs to carve out water for their use. This water is not available to the perched lands along with the river’s trajectory, says the annual wealth report by Credit Suisse released last November.

According to the latest report of the National Sample Survey Organisation (NSSO) on ‘Household Consumption of Various Goods and Services in India’; gold seems to be the most sought after durable item for Indian households and it is clearly perceived as the safer bet even compared to real estates. According to the survey, the share of expenditure on gold has risen sharply in both rural and urban parts of the country.

In rural India, an average person who used to spend 13.8% of his total durable goods expenditure on gold in 2004-05 spent 23.6% now. A similar trend was seen in the spending patterns of their urban counterparts as well. An urban household spent 19.9% of its total durable goods spending on gold now compared to 11.5% in 2004-05.

Not that the government is unaware of this or has not tried to utilise this idle asset. But the results of the government’s three flagship gold-related investment schemes aimed at fishing out a chunk of the 25,000 tonnes of yellow metal lying idle with households have largely been disappointing. The Gold Monetisation Scheme (GMS) was able to mobilise just over six tonnes while the Sovereign Gold Bond (SGB) scheme mobilised about 22 tonnes in three years.

A WGC 2017 report titled “India’s Gold Market: evolution and innovation” said the demand for the precious metal would remain at an average of 850 tonnes to 950 tonnes per annum by 2020. India’s demand for gold saw a seven-year low of 650 tonnes to 750 tonnes in 2016. And since most of the gold demand is met through import, the import of gold at 510 tonnes too was the lowest in the current decade.

But that was more of an aberration; the import bounced back in 2017 to 855 tonnes and is slated to increase further in the 2018 as investors seek alternatives to faltering equity markets and a plunging rupee.

The government’s initiative to restrict gold import by imposing a 10% import fee seems to have largely failed. Likewise, the initiative to curb demand by making the buyer to display the Permanent Account Number for purchases above Rs. 2 lakh worth of gold ornaments has not made any difference in the market.

The rise in gold import has picked up in the current year following investors’ preferences. Gold imports increased by about 4% to $ 17.63 billion in the first half of 2018-19, inflating the country’s trade deficit and fuelling worries about the current account deficit (CAD).

Imports of the precious metal stood at $ 16.96 billion in April-September 2017-18, according to the commerce ministry data. The trade deficit increased to $ 94.32 billion in April-September 2018-19 as against $ 76.66 billion in the same period last year. Increase in gold imports is considered one of the reasons for this rise in trade deficit.

The CAD, which is the difference between outflow and inflow of foreign exchange, widened to 2.4% of GDP in the first quarter of 2018-19. Large trade deficit and depreciation in the rupee against the US dollar are putting pressure on the CAD.

This, it is feared, will increase India’s import bill and this in turn, will stretch the CAD in the coming months. But the impact of the higher import of gold is not restricted to the widening of CAD alone. What is equally concerning is that the increase in the household holdings of gold would lead to a further increase in idle assets. Indian households’ penchant for amazing gold and gold jewellery seems to increase unchecked over the years, rise in prices of the yellow metal, notwithstanding.

Given the global economic situation and its impact on the Indian economy, there is a need to reduce the CAD considerably. Viewed from the fact that India has a large appetite for gold, the economy needs to moderate the demand for gold imports to bring down the CAD to a more sustainable level.