Criticism of Gold Policy – then and now

The way RBI and GoI cry at a general Indian’s interest, especially that of a Hindu’s, in accumulating Gold has been a topic of big discussion in recent times. Scholars like Prof R Vaidyanathan and S Gurumurthy have variously explained why GoI is wrong and why GoI’s desperate measures to control Gold consumption fail. The reasons as stated by both these scholars and many others are multiple but the theme is common – “Gold remains a reliable fall back mechanism for emergencies”.

After some thought, one tends to ask the question – “what has been GoI’s experience with perennial appetite in India for Gold? Has it been this bad only recently?”. We turn to 1963. India faced a gruesome war with China brought about by Nehru. India was under emergency brought about by this war. Desperately short of funds, GoI comes up with Gold Policy.

The policy was intended to reduce consumption of Gold and issue Gold Bonds to people so that GoI could raise capital. The policy also restricted non-ornamental Gold possession to 50 grams for adults and  20 grams for minors. Any excess Gold was to be declared. The policy had no returns. On February 18, 1963, Pandit Deendayal’s observations on this particular legislation were published. Please read the entire essay:

Pandit Deendayal's essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal’s essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal's essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal’s essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal's essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal’s essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal's essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal’s essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal's essay on Gold Control Rules, 1963 and the reasons behind its failure

Pandit Deendayal’s essay on Gold Control Rules, 1963 and the reasons behind its failure

We would like to point out following paragraphs from Panditji’s essay:

But why do people have a hunger for gold? There are both social and economic reasons. In India while social compulsions are on the wane, the economic causes despite changed conditions, have only led to a greater demand for gold. These are due mainly to the Government’s acts of omission and commission. Gold smuggling on a larger scale is considered to have started since 1952-53 and has been continuously on the increase. The economic factors responsible for it should be understood and rectified.

The first and the greatest factor pushing up demand for gold is inflation. If the Government fails to stabilize prices and the value of its currency, there is bound to be a tendency to invest in real specie.

Secondly, there is also lack of banking and credit facilities, especially in the rural areas. In the villages, people have no other means of preserving their savings except through their conversion into gold ornaments. There are no banking institutions where they can invest, and none will lend them any money without security. Naturally if they have gold they can pawn and get money when in need. According to the rural credit survey, the part played by Cooperatives and Land Mortgage Banks is still negligible, considering the vast needs for credit of the agriculturists.

As for the landless labourer and the artisan, there are hardle any credit facilities. He must fall back upon his past savings turned into gold or silver ornaments, in times of distress. The tale of urban middle classes is not much different, despite post-office savings and other banks. The present gold rules will definitely hit these classes hard, unless a widespread network of credit institutions with cooperatives, chit funds etc is simultaneously spread.

Government’s industrial and trade policies are also responsible for pushing up the demand for gold. There are no investment facilities commensurate with the savings of these classes. For all these years private issues have been over-subscribed. Evidently there were funds seeking avenues, which the Governments’ obsession with the socialism had choked. Talks of nationalisation further scared away these funds. Naturally they ran after gold, contraband or otherwise.

Government’s taxation laws, and corruption, so wide-spread in services, have also contributed to this great demand for gold. Both, with officials in certain positions and the business and trading community, there is “black money” which could not become white and therefore was turned into “yellow”. If the Government wants its policy to succeed it has to remedy these causes along with the enforcement of measures envisaged under the Gold Control Rules.

The conditions when this article was written by Panditji were surely different. The situation was that of an emergency followed by a cruel war which left India scarred in many ways. What is the situation today? Without any emergency, just through UPA’s  frenzy for populism and obsession with socialism is leading straight toward the same situation. Even today, Indians buy gold despite GoI’s persistent efforts to discourage it. Doesn’t all this tell us that people didn’t trust Government of India in 1963 and they don’t trust Government of India even today?

Images Courtesy: http://deendayalupadhyaya.org/home.html

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