U.S. policy, not Asian central banks, will drive dollar, economist says

Section:

India Hopes to Wean Citizens From Gold

By Anand Giridharadas
International Herald Tribune, Paris
Wednesday, March 16, 2005

http://www.iht.com/bin/print_ipub.php?
file=/articles/2005/03/15/news/gold.html

MUMBAI, India -- The Indian government is placing a long-range wager
that an increasingly prosperous population can be coaxed to part --
at least physically -- with its boundless hoards of gold.

A policy floated recently would allow Indians to buy virtual
or "paper" gold in denominations as low as $2, instead of investing
in necklaces, bangles, and coins. It is a step, analysts say, toward
bringing millions of poor Indians into the banking system and
unlocking the untapped investment potential of more than $200
billion worth of privately held gold in India.

Indians are the world's biggest gold consumers, with more than half
the country's savings tied up in physical assets. Particularly among
the very poorest, Indians are prone to spending much of their income
to acquire the metal, locking up their assets in the resulting
hoards.

Economists say such a high rate of hoarding constrains the Indian
economy, which is short of capital.

The economy is projected to grow into the world's third largest,
after the United States and China, by 2040.

Details of the program, disclosed in four brief sentences in the
government's budget speech late last month, are still under
discussion.

But the basic proposal is for funds traded on gold exchanges that
allow "gold units" to be bought and sold without physical
possession -- much like buying shares in Coca-Cola without having to
stash the beverage at home.

Initially, the metal itself would be retained by the bank, as the
seller of a paper gold certificate, and the buyer could at any time
trade in the paper to receive the current market value of the
quantity of gold originally bought -- not just the amount of money
originally spent.

The long-range vision, experts say, is to put the value of the gold
to work, perhaps by allowing banks to "sublet" gold deposits, just
as they lend out deposited cash. Doing so could inject more capital
into the economy than top multinationals have done: Indians last
year poured about twice as much money into gold -- about $10
billion -- as foreign direct investors poured into India.

Equally, paper gold could make shareholders of the 700 million
village dwellers who, though starkly poor, purchase about two-thirds
of India's gold.

"They are exposed to only traditional ways of investing," said
Pankaj Razdan, managing director of Prudential ICICI Mutual
Fund. "This would be a different way of getting them to participate
in capital market."

Gold has long been a last line of defense for Indian households, a
hedge against pensions evaporating, ventures folding, prices
inflating, and children's emigrating.

Now the government appears to be betting that, after 14 years of
reforms and prolonged economic growth, growing numbers of Indians
are crossing a confidence threshold that renders the hoarding of
gold outmoded.

"It's probably as significant a measure of what's going on behind
the reforms as any," said Peter Bernstein, the author of "The Power
of Gold: The History of an Obsession."

"If people are really beginning to transfer from gold to financial
assets, that's a tremendous vote of confidence in the reforms."

Indeed, paper gold could serve as a referendum on whether reform has
released Indians from a once-paralyzing fear of the future.

"In the past, our mental model of money was that of a stagnant pool
that always needed to be protected -- from evaporation, leakage, and
reckless use," wrote Santosh Desai, an advertising executive, in an
essay in the local magazine The Week.

"This is the first generation that sees tomorrow as being better
than yesterday, and this fundamental change has transformed the way
in which we see money," wrote Desai, who is the president of McCann
Erickson India.

"From being fearful hoarders of money, we are today willing to be
energized by the continuous flow of money in our lives."

But is this, the world's most gold-gulping nation ready to part,
even just physically, with its gold?

Don't bet your bangles on it.

"What is the reason I'm buying gold?" said Pinank Mehta, an asset
manager. "The reason for my purchase is a lack of trust in the
present institutions. Now why would I buy physical gold and give it
back to the same guys who are the cause of my not trusting the
present system?"

The government can hope that growing numbers of Indians will abandon
that view. Nevertheless, interviews with policy makers, gold
traders, jewelers, and consumers suggest that Indians retain a
cultural need to touch and feel their yellow metal.

Analysts say that for affluent families, paper gold might simply
become an additional investment vehicle.

"I possess about half a dozen single gold earrings," wrote Natasha
Ramarathnam, a Delhi mother, in an e-mail. "When I lose one of a
pair, I put the survivor away and get a new one. But never throw it
out, as I would a silver one, or exchange it at the shop."

"When you buy gold," she wrote, "you buy it for life, and never
think of selling it."

A group of migrant workers, emerging from a garment factory in
Mumbai, said they would embrace a mechanism to bypass money lenders,
who, when converting their gold to cash, physically slice off 10
percent as a fee.

"If there is an emergency or some need arises, you can sell it back.
But it gets cut, and so it's discounted," said Dinanath Kanojaya, a
migrant from Uttar Pradesh state.

A virtual-gold system could also expand much-needed rural credit:
The poor could gradually put cash into paper gold, and then take out
more affordable loans from government banks with paper gold as
backing, said Sanjeev Agarwal of the World Gold Council.

Still, few expect physical gold to make an exit. Some say that gold,
along with cricket and hot tea, is what makes Indians Indian.

Gold is an established feature of Hindu mythology and festivals. The
word "gold" has seven synonyms in Sanskrit. Ancient Indian healers
believed in gold's powers to improve blood flow. It remains the
preeminent status symbol for women rich and poor.

Some attribute India's attachment to gold to a long history of
turbulence: millennia of foreign invasions, rising and falling
empires, political consolidations and disintegrations and avaricious
governments.

Gold is also, many say, the surest way to keep money safe, both from
the reach of thieves and the gaze of the tax man.

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