Why do Indians love gold?

Even as economists and officials beg them not to, Indians splurge on the shiny stuff—in 2011 India imported more gold than any other country—about 1,000 tonnes, or a fifth of global annual supply. That is the same amount that sits in the central bank vaults of Switzerland. Why do Indians love gold?

Although tradition explains part of gold’s allure, such vast purchases are a modern phenomenon. India consumed only 65 tonnes in 1982. Until 1990 imports were all but banned. Bullion had to be smuggled in and its price within India was about 50% higher than outside it. The typical buyer was a poor farmer in south India, for whom gold was an ancient currency and collateral to borrow against in bad times. But deregulation has seen an explosion in gold purchases. Today bullion is bought by rich people, serious investors and speculators. Once crooks imported gold and pawn brokers made loans against it. Now most gold coming into India enters legally through banks. Many loans made against gold collateral are not from shifty money lenders but registered financial firms.

Gold buyers are being rational, in their own way. First, they think the formal financial system is stacked against them. Only a third of Indians have bank accounts. Real returns stink: consumer price inflation is higher than benchmark interest rates and government bond yields. The financial system is geared towards helping the profligate government borrow cheaply at the expense of savers.

Read More: www.economist.com/blogs/economist-explains/2013/11/economist-explains-11