This is an interesting little piece of economic trivia. It might even rise above being trivia in fact, if the whole scheme comes off as planned. But what we've got is the delightful idea that the medium term future of the global gold market is reliant upon the current actions of a number of Indian temples. It's all rather tenuous at present, most assuredly, but the Shree Siddhivinayak and the Tirupati temples are considering joining the Modi government's gold monetisation scheme. The amounts they're considering are entirely trivial by the standards of that global gold market, seriously irrelevant. And yet if they are harbingers of a new wave of activity then that is going to change the market considerably.
The basic problem faced by the Modi government and one that has plagued India for generations is that the preferred method of savings in the country is in gold. This can be anything from a richer person having a small bar or two as their emergency savings all the way to a rural peasant family having its savings in the gold jewelry of the wife. In times of trouble either or both can be pawned or sold to provide liquid resources which can then be consumed in said time of trouble. And from the point of view of the savers, well, gold has kept its value pretty well for several thousand years now (and yes, we really can track significant elements of Indian cultural and even economic practice back that far, there's far less interruption there than in most European countries. The comings and goings of The Moghuls, British, and so on further back changed the underlying cultures much less than say the Saxon then Norman changes to Britain did). It's certainly kept its value in those villages rather better than any paper money or other financial instrument has over those millennia which is why it is so valued in them.
This however produces a very serious macroeconomic problem for the economy as a whole. The estimation is that there's some 20,000 tonnes of gold squirreled away in the country. Without being too detailed about it that's perhaps $700 billion in capital. And India would sorely love to have $700 billion in capital that can be invested in modernising the country and industry. Not, particularly, in the government's hands, but just across the market generally.
And this is what we ask a modern financial system to do. To take in the savings of the populace, to provide savings instruments that they desire (bank accounts, savings accounts, stocks, bonds, whatever) and then recycle those savings back out into the economy as the investments that then make everyone more prosperous. We can indeed find some sophisticated modern economic arguments that say that investment doesn't depend upon savings: but that still leaves India looking at that $700 billion dead, locked into bars of metal which cannot be and are not invested, produce no return and essentially sit under the mattresses (or in the earlobes of) the population. Modi has set up a scheme to try and mobilise these savings.
What is being done is something called gold monetisation. Deposit the gold in a bank and the bank will issue a bond, backed by that gold. The gold can go off into the general market, or be lent, or used as security against loans and so on: the value of the gold is now monetised and in the general economy. The owner of the gold bond gets a small interest rate. This isn't the first time something like this has been tried and it's never been very successful either. And the current scheme isn't so far either. Current estimations are that one entire kg has been deposited into the scheme.
However, it's the reaction of the temples in a culturally conservative country like India that might make the difference:
Sri Venkateswara Swamy Temple, popularly known as the Tirupati Temple, may become the biggest contributor to the Government's gold monetisation scheme with more than 5.5 tonnes of gold.
"It's a good scheme," Andhra Pradesh Finance Minister Yanamala Ramakrishnudu has been quoted as saying. "We have already issued a directive to go for the scheme."
What it might do though is act as the beginning of the cascade which normalises the monetisation scheme.
The richest Hindu temple in the world could soon come to the rescue of
Prime Minister Narendra Modi's plan to recycle tonnes of idle gold and cut economy-hurting imports. The gold monetisation scheme, aimed at persuading individuals, institutions and rich temples to deposit some of their gold stash with banks to recycle, has only attracted about one kg in a month out of a total hoard of over 20,000 tonnes.
And a second temple today announced that it was also considering the idea:
One of the most popular temples in India may soon make the first substantial contribution to Prime Minister Narendra Modi's plan to recycle tonnes of idle bullion to reduce imports and the country's current account deficit.
Mumbai's two-century-old Shree Siddhivinayak temple, devoted to the Hindu elephant-headed god Ganesha, is considering depositing some of its 160 kilogrammes (kg) of gold with banks, according to a spokesman.
The amounts being talked about so far are, even at that 5.5 tonnes, trivial with regard to the global market and even to the 20,000 tonne stash that is already in India. But social norms can change in a cascade and the trick is thus to try to spot the event that triggers that cascade or avalanche.
This column is about economics of course, not investment advice, so what this means for the global gold market will be found elsewhere (I have touched upon it here). And on the economics and public policy fronts we should all hope that this gold monetisation scheme is a success for India. It's being sold domestically as a way to reduce the trade deficit, as India imports vast quantities of gold to top up that stock every year (some to much of it illegally). But the real prize here is not about trade at all, it's about the ability to transform dead capital into something that can be used to finance the development of the economy. And why wouldn't we support a billion and more people getting richer from the employment of their own savings?
