India, along with China, was a superpower for most of the recorded human history. Post colonization, India declined rapidly in global ranking and the US today is the undisputed superpower with China fast closing ranks. India has fallen behind in global influence for many reasons. Perhaps a large part of the blame should lie on external factors, but there is a need to look at internal factors, too. A country achieves superpower status more by the character of its people than from economic factors. A small island of seafarers established an empire through character, discipline and determination rather than economic factors. Here is the story of two nations and how citizens of each country dealt with similar situations.
The US scenario
The Gold Control Act: The US followed silver or gold or bimetallic standards since 1785. During the Great Depression in the early 1930s, the US needed more gold to print more dollars to reflate the economy. But gold was in short supply. If the US bought gold, prices would get pushed higher. In 1933, Franklin Roosevelt issued an executive order (executive order number 6102) prohibiting Americans from holding gold privately. Not only did he ban fresh purchases, but also ordered citizens to sell their private holding to the government at a below-market price. After a lot of requests, he raised the purchase price to market level. He created enough deterrents in the form of a harsh penalty of $10,000 (in 1933) or 10 years in jail.
The response: US citizens responded positively, partly because of nationalist feelings and partly due to the fear of harsh punishment.
The effect: The character of US citizens gets reflected in the fact that the US Federal Reserve is the biggest owner of gold among central banks and the largest individual owner of gold in the world. It is no mean achievement for a nation that got established a few hundred years ago.
The Indian scenario
India’s obsession with gold is known worldwide. From the days of Lothal civilization, India exported spices, textiles and other goods and imported gold, silver, diamonds and pearls. Numerous invasions by foreigners probably forced Indians to own gold, a thing that can be easily moved, hidden or liquidated. The inheritance system, especially during the Mughal era when the state’s approval was needed to transfer wealth from one generation to another, also supported the demand for gold.
During the British Raj, India was systematically stripped of its resources and became a net importer. The obsession for gold compounded the issue further.
The Gold Control Act: Post-Independence, the foreign exchange drain was accentuated in 1962 during the border dispute with China. Morarji Desai, then finance minister, came out with Gold Control Act, 1962, which recalled all gold loans given by banks and banned forward trading in gold. In 1963, the production of gold jewellery above 14 carat fineness was banned. In 1965, a gold bond scheme was launched with tax immunity for unaccounted wealth. All these steps failed to yield the desired result. Desai finally launched Gold Control Act, 1968, which prohibited citizens from owning gold in the form of bars and coins. All existing holding of gold coins and bars had to be converted to jewellery and declared to the authorities. Goldsmiths were not allowed to own more than 100g of gold. Licenced dealers were not supposed to own more than 2kg of gold, depending upon the number of artisans employed by them. They were banned from trading with each other. Desai believed that Indians would respond positively to these steps and stop consuming gold and help conserve precious foreign exchange. Being a true Gandhian, he believed in his experience during the freedom struggle, when Indians had positively responded to Mahatma Gandhi’s call to adopt local goods and boycott foreign goods.
The response: What happened thereafter was completely unexpected. The demand for gold remained as firm as ever and gold smuggling became the order of the day, accounting between 30-70% of actual imports, according to unofficial estimates. The hawala market was developed to pay for gold smuggling through remittance.
The effect: An unaccounted black market emerged as cash was used for buying smuggled gold or paying for the rupee part of hawala trades. Drug trafficking started as smugglers diversified their business risk. Black economy and tax evasion became rampant, corruption became integral and acceptable. The Indian economy kept losing its shine till the early 1990s crisis forced a course correction.
What lacked? Desai wanted to slow down gold imports and hoped that Indians will respond positively by recycling existing gold to make new jewellery, but Indians supported the smuggling of gold instead. In hindsight, the Gold Control Act should have been backed by education of consumers, provision of effective financial alternative to replace investment in gold, a simple message to citizens to view gold imports from the India viewpoint rather than Indian viewpoint, a harsher punishment for violation, speedy justice and effective governance to enforce the law.
The present scenario
Even today India is paying a heavy price for its obsession for gold and precious stones. A large part of retail saving is allocated to physical assets such as gold and real estate. Inadequate financial saving is restricting higher rate of investment. It is also increasing dependence upon foreign capital. Inadequate investment is reducing the pace of economic growth, curtailing employment generation and keeping millions of Indians below poverty line.
Perhaps US is where it is today because US citizens backed Roosevelt’s executive order 6102 whole-heartedly. Perhaps India is where it is today because Indians back-stabbed Desai’s Gold Control Act, 1968.
Nilesh Shah is director, Axis Direct.
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