Gold’s untapped potential: Transforming India’s idle wealth into productive capital

DCM Editorial Summary: This story has been independently rewritten and summarised for DCM readers to highlight key developments relevant to the region. Original reporting by Economic Times, click this post to read the original article.

Since the severe foreign exchange crisis of 1991, the term Foreign Direct Investment (FDI) has become commonplace in Indian households, primarily due to its role in balancing payments, providing capital, and stabilizing the currency. However, a pressing question has emerged: can gold fulfill a similar purpose as FDI? Over the past decade, India has seen around $400 billion in foreign investments, while gold imports have totaled between $450 and $500 billion, significantly impacting the country’s import bill and trade deficit. The challenge lies in the fact that gold purchases often result in unproductive household savings rather than investments in productive assets.

India is currently the largest holder of gold, with an estimated 25,000 tonnes accumulated by households, valued at approximately $3.8 trillion, or around 89% of the country’s nominal GDP. If this gold were redirected into productive sectors, it could potentially replace much of what FDI provides. The outflow from gold imports has contributed to a trade deficit of about $400 billion, and excluding this deficit would considerably narrow India’s overall trade imbalance.

While FDI brings capital, technology, and global knowledge, the vast amount of household gold represents a comparable wealth pool. The key issue is not the lack of capital but finding ways to unlock and utilize this domestic wealth for productive purposes. Currently, India’s foreign exchange reserves include about $225 billion in US Treasuries, yielding around 4%. In contrast, gold has shown a ten-year compounded annual growth rate of over 12% in dollar terms, suggesting a need to reconsider the composition of reserves.

To address these challenges and harness the potential of household gold, a proposed Voluntary Gold Procurement Scheme (VGPS) could allow individuals to sell their gold at a certified purity for a discount to the market price, with settlement at the time of procurement. Additionally, individuals could opt for compensation through Zero-Coupon Government Gold Bonds, promoting financial discipline and enabling the government to access domestically held gold. These initiatives aim to convert idle gold into productive economic use, fostering domestic capital generation while keeping the benefits within the country.