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Government Policy No Match for Indian’s Love of Gold

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Government regulations are no match for Indians’ love of gold.

Try as it might, the Indian government has been unable to stem the tide of costly gold imports, nor stop Indians from hiding billions of dollars in undeclared “black money” by investing in the yellow metal.

The latest attempt was a requirement that buyers of high value gold jewelry must provide their tax ID. But instead of denting demand, the move has apparently boosted unofficial trading.

Beginning on January 1, the Indian government made it mandatory for customers to disclose their tax code, known as a Permanent Account Number (PAN), for gold purchases above 200,000 rupees (a little less than $3,000). The idea was to allow the government to track large jewelry purchases, and more importantly, deter hundreds of millions of Indians outside the tax system from buying gold as a way to hide their wealth from authorities.

But Mayank Khemka, managing director of jeweller Khemka Group of Cos., told Reuters that instead of forcing transactions into the light, the law has done the exact opposite, driving many dealers to join the underground trade:

Some jewelers (are) moving to unofficial trade from official. No one wants to lose customers just because they don’t have a PAN card.”

Dealers have come up with a creative way to skirt the rule. They simply split the transaction into multiple small invoices, or issue informal receipts.

India led the world in gold consumption last year, with jewelry and investment demand increasing 6% to 890 tons. Indian jewelry consumption increased 14% year-on-year.

Indians value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system. Of India’s 1.25 billion people, only 223 million hold PAN cards.

You can see why the government wants to stop the flow of gold into these areas. The yellow metal allows people to hold on to their wealth outside the official system. But no matter what the government does, it fights a losing battle against much stronger cultural and economic realities.

The tax ID requirement is just the latest government move to stem gold imports. In 2013, the government raised import taxes to 10% though a series of hikes:

The duty failed to curb demand but revived smuggling networks which, the World Gold Council estimates, imported 175 tons of gold in 2014, nearly a fifth of total annual arrivals.”

The bottom line is that Indians will find ways to buy gold. Harshad Ajmera, a gold wholesaler in the city of Kolkata, explained the power of gold in India to Reuters:

Gold is bought for almost every occasion, for weddings, birth ceremonies and festivals. The government cannot deprive 1 billion people from buying gold just because they don’t have a PAN card.”

We can learn two valuable lessons from Indian government’s battle against gold.

  1. Government policies are no match for markets. When demand for something becomes strong enough, people will figure out a way to get it, no matter what barriers the central planners throw in front of them.
  2. Gold is worth owning. The Indians understand gold in a way that many Americans have yet to grasp. They recognize the need to store their wealth in a secure way, and they know gold serves as a safe haven. They cling to gold because they recognize its value – so much so that they’ll skirt the law to own it.


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One thought on “Government Policy No Match for Indian’s Love of Gold

  1. aki says:

    Hi Peter, Thanks for posting this article. It is very true.

    Recently Indian Government started Sovereign Gold Bond. The response was too low as they scheme did not return gold for redemption but only useless printer paper.

    There was a lack of response both the times the scheme was offered.

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