By Nilesh Shah The US dominates global economy. India, which dominated the global economy for many centuries, is a dismal shadow of its glorious past. India lost its pre-eminence sharply post-colonisation. Our fall in global economic ranking could be attributed to many external factors. However, a host of internal factors are equally responsible for the downfall. Tax evasion, corruption, fear of law etc, are internal constraints. Maybe the feeling of what one can do for the country is missing among Indians as we came together as a nation just 68 years ago. Economic might is achieved as much by character of people as from economic factors. A small island of seafarers established an empire where sun never set in the territory through character, discipline and determination rather than just military might. Robert Frost immortalised the choice of taking the less traveled path in his poem. “There are two paths in a road that forks and I choose the path less traveled.” Let me narrate how Americans choose a less traveled path and Indians did not, relating to gold. The US followed silver or gold or a bimetallic standard since 1785. During the Great Depression the US needed to print more dollars to reflate their economy. To print more dollars, the US needed more gold which was in short supply. Any buying by the US would have pushed gold prices higher. Franklin Roosevelt, president of the US in 1933, issued an executive order no. 6102 prohibiting private holding of gold. Not only he banned fresh purchases but also ordered Americans to give away their private holding to government at below-market prices. After a lot of hue and cry, he raised the purchase price to market levels. He created enough deterrent in the form of severe penalty of $10,000 (in 1933) or ten years in jail. Americans responded positively partly by patriotism and partly by the fear of the law. The sacrifice made by Americans made the US Fed, the largest owner of gold in the world. That distinction is still carried by Fed even today. It is no mean achievement for a civilisation which got established just a few hundred years ago. Americans chose the less travelled path and put the country over self, reflating their way out of depression. Indians’ obsession with gold is known to everyone. In the last 10 years we have imported gold in excess of $290 billion, more than the FDI and FII flows received in that period. From the days of Lothal civilisation, Indians exported spices, textiles and other goods and imported gold, and precious stones. Numerous invasions by foreigners probably forced Indians to own gold which could be moved, hidden or liquidated. The inheritance system especially during the Mughal era where state and its officers’ approval was needed to transfer wealth from one generation to the next supported demand for gold. Gold obsession continued for Indians even post-independence putting a strain on the economy as precious foreign exchange resources were wasted. The FX drain was accentuated in 1962 during a border dispute with China. Morarji Desai, then finance minister of India, came out with Gold Control Act 1962. It recalled all gold loans given by banks and banned forward trading in gold. In 1963 production of gold jewellery above 14 carat fineness was banned. The gold bond scheme was launched with tax immunity for unaccounted wealth in 1965. All these steps failed to yield results. Morarji Desai finally launched Gold Control Act 1968. It prohibited citizens from owning gold in bars and coin form. Goldsmiths were not allowed to own more than 100 grams of gold for jewellery making. Licensed dealers were not supposed to own more than 2 kg of gold depending upon the number of artisans employed by them. They were banned from trading with each other. Morarji Desai believed that Indians will respond positively to his steps and stop consuming gold. What happened thereafter was unexpected. Demand for gold remained firm. Gold smuggling became the order of the day accounting between 30-70% of actual imports as per unofficial estimates. Hawala market was developed to payfor-gold smuggling. Remittance routed through hawala and over/under invoicing of trade provided capital for gold smuggling. Black economy mushroomed 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 an acceptable part of our society. Indian economy kept on losing its shine till the early 90s crisis forced a major course correction. Morarji Desai wanted to slow down gold imports and hoped that Indians will respond positively by recycling existing gold to make new jewellery. Indians supported smuggling of gold rather than letting go of their obsession of gold. In hindsight the Gold Control Act should have been backed by financial education, provision of effective financial alternatives to replace investment in gold, touching the patriotic feeling of Indians and, most importantly, an effective push through severe punishment for violation of law. India is paying a heavy price for its citizens’ obsession with gold and precious stones. A large part of retail saving is allocated to physical saving like gold and real estate. Inadequate financial saving is restricting higher rate of investment. It is also increasing its dependence upon foreign capital. Inadequate investment is reducing the pace of economic growth, curtailing employment generation and keeping millions of Indians below poverty lines. Maybe time has come for us to put a statutory warning on gold coins, bars and jewellery (saying) Buying of Gold is Injurious to the Financial Health of India. Maybe the US is where it is today because US citizens backed Roosevelt’s executive order no. 6102 whole-heartedly. Maybe India is where it is today because Indians back-stabbed Morarji Desai’s Gold Control Act 1968 whole-heatedly. The gold monetisation scheme proposed by the government is an opportunity for Indians to choose the road less travelled. (The writer is Managing Director, Kotak Mahindra AMC. Views are personal)