The Indian government cannot digest gold. For 60 years after the beginning of World War II, it banned imports of gold. Then, as foreign exchange reserves began to mount, it slowly lost its aversion to letting citizens decide how many ornaments they chose to wear. It was the present finance minister who, in his early days in the role, restored to Indians the freedom to buy and hold gold that was lost in 1939. Now the same Mr P. Chidambaram is exasperated at their insatiable craving for gold, and has threatened to impose an import duty on it. Fifteen years ago, he managed the fisc of a country that was emerging from decades of socialist slumber; liberalization was still heroic or treasonous, depending on one’s ideology. Now the dividend on liberalization has been long received and spent; the Congress sees no further gains from it, and is going back to its dirigiste roots. There was a time when Mr Chidambaram left his party rather than change his views. Today he is older and more hopeful; he would rather dump his ideals than forgo the returns on loyalty. That seems to be the only explanation for his change of heart.
But even if he is being lured back to control raj, he should ask himself how well the import duty on gold would work. The price of gold is over $50 a gram; a small motorboat can easily bring across a couple of tons of it, worth $100 million, from Dubai to the west coast overnight. Once he bans its import, a few hundred boatloads will be enough to supply entire India’s requirements. But since their business will be illegal, the businessmen will have to erect an entire financial infrastructure to bribe customs officials, policemen and truck drivers and distribute the gold smoothly across the country. They will create a parallel government; apart from creating a new business, they will unsettle the foundations of the government Mr Chidambaram is a proud member of. His legalizing of gold imports put Haji Dawood out of business; today he lives in a fortress in Karachi protected by a Pakistan that appreciates his past services. Now Mr Chidambaram is getting ready to create business for a hundred new Dawoods. He should think twice before he acts.
If he does so, he will realize that the citizens whom he aims to frustrate are not entirely stupid. Gold has doubled in price over the past five years; there are not many assets that can match its returns. It is expectations that rule investment; if people expect gold prices to continue rising, they will continue to invest in it whether it is legal or not. If he thinks investment in gold is irrational, he must have some other asset in mind that would give a higher return. Let him tell the country; India is dying to know about it.