By Sreekumar Raghavan
Gold is considered a hedge against inflation in many countries now. Along with Crude Oil prices and the dollar, Gold must be the most tracked after commodity in the world. India consumes more gold than any other nation. But how did this happen? The present tendency to buy gold as a hedge against inflation might not have been the evolutionary instinct that guided them to love this yellow metal.

Absence of a strong banking system might have been a major reason for people investing in gold. According to Jagdish Bhagawati, in many underdeveloped or developing nations people had a tendency to buy land or invest in gold as banks did not reach rural and inaccessible areas. “Gold happens to be favoured in many underdeveloped countries,” Jagdish Bhagawati wrote in his acade,oc work, The Economics of Underdeveloped Countries. He says that in such a scenario villagers had to invest in land, gold or any such tangible asset over financial assets such as bank deposits, shares and mutual funds.

Historically or from evolutionary point of view the stock markets, mutual funds, commodities and bank deposits might provide more returns or security than investing in tangible assets like gold. But this evolutionary instinct to hold investment in gold may be a past legacy that we still cling on to although it may have outlived its purpose for many classes of people.

Despite bank nationalisation, more than 50 percent of the rural areas still do not have access to banking. This is one of the reasons why the Reserve Bank of India directed the banks to focus more on financial inclusion in the face of rising suicidal wave in rural areas due to farmer indebtedness to money lenders.

In the late eighties, Jagdish Bhagwati wrote, “It is interesting to note that the tendency to use savings to purchase tangible assets such as land is sometimes socially unproductive.. The preference for land as an asset, for prestige and other social reasons, may thus act as an instrument of dissaving and hence a brake on the national capacity to save.”

He also felt that Gold holdings, in particular can Lead to social waste. “India had recently lost valuable and scarce foreign exchange through illegal payments for smuggled gold imports. Among other corrective measures a restriction on the purchase of 24-carat gold has been imposed so as to force household away from their socially deleterious attachment to gold-holding,” Bhagawati wrote in his academic text book published in 1980’s.

Following the liberalization trend, the restrictions on gold holdings and imports were also eased which could have curbed smuggling but not the propensity of the average India to buy gold.

It is also a fact that when agricultural incomes decline due to bad crops or price fall, consumption of precious metals including gold could come down in India. There are other reasons why gold could be seen as a good investment and it rises during festivals and marriage seasons in different parts of the country.

However, large could be your bank or cash holdings, it cannot be displayed which is not the case with gold or a house which could explain why despite being dubbed a `social waste’ by some economists, the investments in housing and the precious metal is high in India no wonder the rising prices or inflation.

However, rising disposable incomes have led to a growing market for diamond and Platinum jewellery but they are still far short of the volumes generated in gold.

Perhaps, many may disagree with Jagdish Bhagwati when he said that investment in gold is a “social waste.” However, from a historical or evolutionary point of view, his argument that an inaccessible banking system caused the love for gold cannot be outrightly dismissed. The instinct for possessing gold perhaps grew along with its potential for display and possibly as a hedge against inflation, the latter being the incidental cause.

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