Legitimising myths about gold imports

The massive buyers of gold in the past two years have not been distressed farmers or manual scavengers, notes Ajit Balakrishnan.

When an economic crisis hits, everyone goes looking for someone to blame.

The blame for the foreign exchange crisis of the mid-1960s was put on socialism and its import substitution philosophy.

The blame for the foreign exchange crisis of the late 1980s was put on too much government and not enough market forces.

The blame for the present crisis is being put on a new villain: The Indian peasant who apparently cannot escape from his centuries-old obsession for gold.

In 2012 alone he and his fellow peasants are supposed to have lapped up imported gold worth $56 billion, and their action is supposed to have bled the country white.

It is the Indian 'deep cultural affinity' for gold that is at the root of this crisis, says the trade association Assocham in its report titled India's Gold Rush. 'The traditional gold consumers are Southern peasants buying jewellery,' says The Economist. 'The fundamental reasons for buying gold jewellery ... are rooted in Indian culture and weddings,' says the World Gold Council, a trade body of gold producers.

I wish all this was true. If it was the Indian peasant who was doing all this buying, India's peasants would rival Arab sheikhs in wealth by now. Gold prices rose fourfold in the decade ending 2012 and threefold in the last three years alone, which means Indian peasants would have added $30 billion to $40 billion to their wealth.

To understand today's crisis, we have to turn to the wisdom of Jim Sidanius, professor of psychology at the University of California, Los Angeles, and his concept of 'legitimising myths'. In the 19th century, 'the white man's burden' -- the notion that England, France, Spain and other European nations had a duty to civilise the less civilised parts of the world such as Asia, Africa and South America' -- was the myth that was created and used to legitimise colonialism.

Many in North America believed that chattel slavery was benevolent and in the interest of African Americans, who they reasoned were simply incapable of attending to their own affairs. It was this myth that made an economic and moral argument to legitimise slavery.

In a similar fashion, the myth of the gold-obsessed Indian peasant is being invoked to legitimise the actions of many different players in the past two years leading up to the gold import crisis.

Indian banks facing regulatory pressure to lend more to the 'priority sector' used this legitimising myth to massively expand their lending to gold loan companies at concessional rates of interest, giving gold loan companies a bountiful supply of low-cost funds.

The 'priority sector' was supposed to comprise marginal and distressed farmers, tiny businesses and people such as manual scavengers who needed funding to seek alternative occupations. Indian banks have convinced the authorities that their lending to gold loan companies should also be counted as priority sector lending.

The legitimising myth of the poor Indian peasant who has access to no other financial instrument was invoked to accomplish this objective.

Except that the massive buyers of gold in the past two years have not been the distressed farmers or the manual scavengers.

The expert committee set up by the Reserve Bank of India explains the true motivation for buying gold in India: 'While all investments in financial savings instruments are recorded and lead to a clear trail for tax purposes, investment in gold generally eludes such tax traps.'

To put it bluntly, it is quite easy to slip a tiny and barely noticeable five-gram Ganesha worth Rs 17,000 into the palm of someone from whom you need a financial concession or speedy service. There is all evidence that parties to such transactions, both in the private and the government sector, are the ones driving the demand for gold -- not the poor peasant or the manual scavenger.

The trouble with legitimising myths such as the white man's burden and that of North American chattel slavery is that when such myths are invoked to support and justify the actions of a small minority, they can also damage larger society.

See the damage the gold import crisis is inflicting on India as it works its way through the Indian economy: Currency traders, on noticing that India's export revenue is so much smaller than its import payments, have speculatively driven down the value of the rupee; a depreciating rupee makes imported products such as oil more costly; State-owned oil firms are then faced with a dilemma -- either hold their selling prices for kerosene and diesel and demand that the government should give them vast subsidies, money found by the government by cutting investments in primary schools, health care, roads and bridges, or raise the prices of diesel and kerosene and in turn make vegetables and rice even more unaffordable for the poor peasant and manual scavenger!

And if the price of gold were to suddenly drop back to the level of five years ago, we would have a banking crisis as well on our hands. Such is the insidious power of a legitimising myth.

Ajit Balakrishnan is the author of The Wave Rider.
ajitb@rediffmail.com