Monday, July 29th 12:02 PM IST

The 200 tons of Gold that saved India

# gold  # balance of payments  # Indian economy  # RBI  #   

However, not many people may have forgotten the fact that it was the nation's gold reserves that helped tide over a balance of payments crisis in 1991 when the nation had to phyically ship its reserves of gold to London to stand collateral for an International Monetary Fund loan failing which there would have been a default on loan payments.

By Sreekumar Raghavan
KOCHI, INDIA (Bullion Street): India's love for Gold is giving sleepless nights for India's Finance Minister Palaniappan Chidambaram and his reign has seen the maximum number of measures being taken to curb the insatiable appetite for gold in the country. Import duties were raised from 2% to 8% and the Reserve Bank of India (RBI) has put in place a number of measures to curtail gold imports.

The Reserve Bank of India continues to hold $21.55 bn in gold reserves as per latest weekly update issued on Friday and central bank buying in various countries continue to support gold. 

However, not many people may have forgotten the fact that it was the nation's gold reserves that helped tide over a balance of payments crisis in 1991 when the nation had to phyically ship its reserves of gold to London to stand collateral for an International Monetary Fund loan failing which there would have been a default on loan payments. 

This crisis ulitmately served as a turning point for the Indian economy which went steadfast in its path of liberalisation extending invitation to a number on foreign industries to set foot on Indian soil. In my interactions with some RBI economists a few years after the crisis was solved, they pointed out that the crisis was single handedly solved by the RBI. 

After Independence, the Nehruvian era thought that the nation's soverignity should be protected on the economic front too and there were huge investments to build dams, factories and scientific establishments. Self reliance was the motto and the economy was more or less shut to global trade. 

According to former India Minister for external affairs, Shashi Tharoor, the balance of payments crisis brought to the fore dangers of remaining aloof from global trade. In his book Pax Indica, India and the world of the 21st Century (Penguin, 2012), " It was only after a world class balance of payments crisis in 1991, when our government had to physically ship its reserves of gold to London to stand collateral for an International Monetary Fund laond, failing which we might have defaulted on our debt, that India liberalised its economy under our then Finance Minister Manmohan Singh."

"The amount of gold possessed by the women of the household has often been seen, in Indian culture, as a guarantee of the family's honour. Surrending the natation's gold to foreigners betokened a natinal humiliation that old protectionism could not survive. Since then, India has become a poster child for globalisation..," writes Tharoor in this engrossing book.

Even as India continued to open up its economy to global trade and investment, the love for gold hasn't subsided as yet although China might become the top consumer of the yellow metal this year, according to World Gold Council estiamtes. The RBI had also bought 200 tons of gold from IMF in 2009 and may be periodically buying or selling gold to maintain a balance of its forex and other reserves.

Apart from official gold reserves, Indian households, temples and religious establishments continue to hoard gold, seeing it as the ultimate preserver of wealth in difficult times.

IMF update on gold holdings
Meanwhile, Barclays Research quoting latest IMF data on gold holdings by various countries stated that Russia added 0.3 tonnes of gold to its reserves in June (38.7 tonnes in H1 13), to take its holdings to 996.4 tonnes, alongside the Ukraine adding 2.5 tonnes (3.4 tonnes in H1 13), taking its holdings to 38.9 tonnes, while Kazakhstan added 1.4 tonnes in June, to take its reserves to 130.9 tonnes (15.6 tonnes in H1 13). Excluding Turkey (which shows gold additions due to accepting gold in its reserve requirements from commercial banks), net buying so far in H1 13 trails H1 12; thus, despite lower prices, additional buying has not been reported to make up for the shortfall created by net disinvestment. Separately the latest weekly ECB statement revealed gold holdings were unchanged across the Euro-system banks during the week ended 19 July. 

(The author is Chief Strategist at Commodity Online Group, Email: info@bullionstreet.com)
 

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