Innovative Country Cousin of KFC?

There is never a shortage of innovation in Small Towns, especially when it comes to names. ATM can mean a lot of things to different people in various sectors. The banks would like to believe it is "Automatic Teller Machines" while customer would like to believe it is "Any Time Money". In some small towns (like Vijayawada and Kalwakurthy) ATM can also mean "Any Time Milk".

This interesting fast food restaurant in Vijayawada calls itself "Most Favourite Chicken". Probably would like to comfort its customers that it is as good (exterior looks and interior ambiance) as the better known multinational company. The multinational itself can do nothing to complain. 

Gold, Government Policy: Need for a reality check

In recent weeks, India has witnessed an interesting debate and policy interventions aimed at reducing the import of gold bullion in different forms. These measures are a continuation of the attempt to increase tax on gold inaugurated in the Budget of 2012. In the past few weeks, there have been a series of measures aimed at restricting the banks from lending for such purchases, restricting imports from people returning/visiting India and tweaking of other policies. Innumerable statements that seek to encourage gold owners to embrace electronic and other gold instruments are the order of the day. Invariably, these measures triggered a debate in the press about the reasons and efficacy of such measures.

The estimates about the quantum of the gold available within the country varies from 18000 tonnes to 20,000 tonnes, excluding the amount of gold held by temples. It is almost impossible to accurately estimate the quantum of gold available within the country. Imports are reported to have doubled since 2011. The rise in prices have only added to the attraction of gold. A clearly discernbile trend in India is the fact that millions of people are buying very small quantities, often no more than 1 to 10 grams at a time.

At the outset, it is imperative to underscore that a large part of these measures, however justified are hasty. These measures are hasty keeping the peculiarities of the socio-economic structure of India - even ignoring the cultural significance attached to owning gold in India. A number of articles have drawn attention to the need for a more efficient use of the huge amounts of gold already available in the country. Owning gold has not only cultural significance but also practical uses - probably far beyond what the government would like to accept. 

The response of the government has been remarkable insensitive to the needs of the people. Government seems to think that increasing import duties will help temper the demand for gold and give a fillip to the use of  existing gold hoard since most of the gold is anyway stashed away or in the form of jewellery. Unfortunately, this wishful thinking is unlikely to help either the government or the consumers. The only group that gains are the smugglers because any differential in the price of gold in the international and national markets will only lead to the opening of yet another profitable business. 

Electronic gold and related instruments have only a limited appeal. They require people to actively trade/invest on the stock exchanges. India has relatively few investors as a percentage of its population. Opening and Operating Demat accounts continues to be cumbersome as well as expensive, especially when holdings are of low value and volume. A more pertinent reason why gold and related electronic instruments are unlikely to succeed are due to reasons related to trust and problems in the dispute resolution mechanism. It is less risk to actually physically hold gold rather than place it with a formal institution or depend on brokerage houses and attempt redressal for fraud or litigation that springs up due to other reasons. 

Policy makers have to realise that in India gold is not only credit but as good as cash in hand in for the millions of people. Though, people like Warren Buffett may not have any use for gold; but, throughout India one can raise cash literally in the middle of the night by pledging gold. (Buffett is reported to have stated: "Gold get dug out of the ground in Africa, or someplace, then we melt it down, dig another hold, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head"). Apparently from Omaha the view from Mars is quite twisted. In the poorer parts of the developing world, gold is probably one of the most liquid assets and a more transparent asset class to own: even the poorest can compute their rise or fall in value everyday. They are more liquid than stocks even in the remote regions and more transparent opaque real estate market. Moreover there are very few markets accessible where people can invest relatively small amounts. Little wonder that all parts of the gold business - physical sales to lending against gold are booming business segments that has drawn even the largest players. Gold loan business is estimated to be worth Rs.300,000 crores per annum with about 2/3rd being informal in nature. 

The rise in gold price and thanks to the increased investments have single-handedly helped the poor improve their 'creditability' among the banks and pawnbrokers far beyond what government policy has achieved over the past decade. In such a scenario there is a need for the government to reconsider its suspicion (or even hostility) to purchase of gold.

Time for the finance minster to take a visit beyond the metros?

The picture below of a Pawn Broker from a village in Chitoor District