The Reserve Bank of India (RBI) purchasing gold directly from individuals with jewelry could help reduce the nation’s import bill by utilizing existing gold within the country. India imports substantial amounts of gold annually, increasing trade deficits and putting pressure on foreign reserves. By incentivizing individuals to sell jewelry to the RBI, this approach could reduce the need for imports while boosting foreign currency reserves. Additionally, it could provide individuals with a convenient avenue for liquidity and help channel unproductive gold into the economy. This strategy, if effectively implemented, could positively impact the economy and decrease reliance on costly imports.

Gold Hoarding in India :A Complex Socio-Economic Phenomenon

India’s historical and cultural affinity for gold is unparalleled, making the country one of the largest consumers of this precious metal globally. However, the practice of hoarding gold, primarily in the form of jewelry, has sparked debates about its impact on the Indian economy. While gold holds sentimental and cultural significance, it is often criticized for being an idle asset, not contributing to the active flow of resources in the economy.

The Cultural and Traditional Importance of Gold

Gold has long been a symbol of wealth, status, and security in Indian society. It is considered a safe investment, especially in rural areas where access to formal financial systems may be limited. Gold jewelry is gifted during festivals, weddings, and other significant life events, making it an integral part of Indian social customs. This deep-rooted cultural attachment has made Indians wary of selling their gold, viewing it more as an heirloom than an economic
asset.

Economic Implications

The primary criticism of gold hoarding is that it locks up capital that could otherwise be used productively in the economy. When individuals store their wealth in gold rather than investing in financial assets like stocks, bonds, or business ventures, the economy loses out on potential liquidity and growth opportunities. According to a World Gold Council report, Indian households are estimated to hold over 25,000 tons of gold, most of it in jewelry. This stockpile is largely untapped in terms of contributing to the formal economy.

Moreover, India imports a substantial amount of gold, contributing to the country’s current account deficit. The Reserve Bank of India has tried to counterbalance this by introducing gold monetization schemes, which encourage citizens to deposit their gold in banks in exchange for interest. However, these schemes have seen limited success, as emotional attachment and trust issues deter people from participating

*Balancing Tradition and Economic Needs

While gold hoarding does limit the immediate flow of capital within the Indian economy, it is overly simplistic to frame this practice as entirely detrimental. In times of economic distress, gold serves as a financial safety net for millions of households. It acts as a hedge against inflation and currency fluctuations, particularly in rural India, where banking penetration is still inadequate.

To fully harness the economic potential of gold, policies must balance respect for cultural practices with innovative solutions. Enhanced financial literacy, improved trust in gold monetization schemes, and more accessible formal financial services could encourage the mobilization of dormant gold assets. If done correctly, this could channel more capital into productive investments, contributing to broader economic growth.

In conclusion, while gold hoarding in the form of jewelry does limit capital flow in the economy, it is a multifaceted issue tied to cultural, economic, and social factors. To address this, a blend of policy reforms and cultural sensitivity is necessary to unlock the potential of this dormant wealth without alienating citizens from their traditional practices.

Swaminathan Padmanabhan is the senior Director of Data Science at Freshworks. An alumnus of IIT Madras, swaminathan has solid experience in using Machine Learning and Data science for improvement of business operation across a veriety of verticals for leading organization prior to joining Freshworks.

Swaminathan Padmanabhan
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Have you ever wondered how much gold Indian households possess compared to the government’s reserves? The answer might surprise you. Indian households are estimated to hold around 27,000 tonnes of gold, which dwarfs the country’s official reserves of 803.5 tonnes held by the RBI.

To put this in perspective, the total financial assets of Indian households stood at ₹280 lakh crore in 2023. This figure encompasses substantial investments in bank deposits, life insurance funds, provident/pension funds, and equities. In comparison, the estimated value of just their gold holdings, at current prices, surpasses ₹160 lakh crore, highlighting the enormous wealth locked in this precious metal.

Globally, the United States leads in official gold reserves with 8133 tonnes, followed by Germany (3355 tonnes). When it comes to emerging economies, China’s central bank holds about 2200 tonnes, while India’s reserves amount to 803.5 tonnes. However, when considering household gold ownership, the picture changes dramatically. The US and China each have household gold holdings of approximately 24000 tonnes, while German households own about 9000 tonnes. When combining official and household holdings, India’s total of nearly 28,000 tonnes would place it second only to the United States, which has a combined total of about 32,000 tonnes.

Despite this substantial private wealth, India’s economy doesn’t fully benefit from these massive gold holdings. While gold has appreciated significantly and acts as an excellent hedge against inflation, privately held gold often remains as idle wealth, not contributing directly to economic growth. A prime illustration of this is India’s relatively low credit rating, which persists despite significant gold holdings by its citizens.

Approximately 20% of household gold in India is pledged for loans, serving merely as collateral without any direct economic value transfer. The government’s Sovereign Gold Bond scheme, aimed at activating this dormant wealth, has seen reasonable success but is considered expensive due to the substantial incentives required to shift citizens from physical jewelry to paper gold.

Another interesting point to note – recent data shows that the percentage of gold jewelry purchases involving exchanges has surged from about 20% to 50%, marking a significant shift in behavior when consumers upgrade their old jewelry. However, households typically lose 20-25% in value during these exchanges due to various factors such as undervaluation of old gold, and weight deductions for alleged impurities.

Here lies an opportunity: The government could facilitate and participate in this active exchange market, directly purchasing gold from citizens instead of relying solely on imports. This approach could align with the RBI’s strategy of increasing gold reserves, which have grown from 618 tonnes in 2019 to 803.5 tonnes in 2024.

If a portion of the RBI’s gold purchases could be sourced directly from citizens exchanging old jewelry, it could significantly reduce gold import bills, benefiting both the government and individuals upgrading their jewelry. Moreover, this strategy could help to further reduce India’s current account deficit.