Bonds of trust are better than gold bonds?

Perhaps the biggest hurdle to the Indian economy is a lack of trust between the government and the people. Our politicians, civil servants and police inherited an adversarial system from the British which has given them powers of an invader and made us feel helpless. Naturally they do not want to give up their feudal privileges while the people do everything to bypass the system, thereby subverting it. One such behavior is the love of gold which baffles economists and frustrates politicians. Most of it is in the form of jewellery, which includes wasteful labor costs, lies in bank lockers, making it totally unproductive, and is a waste of foreign exchange, because India does not produce gold. Indians hoard more than 20,000 tonnes of gold costing $1.16 trillion, half our GDP. If this money could be brought into the economy it would pay for all our infrastructure projects and growth would rocket. To entice people to give up their gold the government wants to issue gold bonds which will pay interest and can be redeemed at any time at market cost. There could even be a trading market for them. But will people give up their gold reserves? Apparently Indians have an emotional attachment with the metal, so may invest in the bonds but may refuse to give up their previous buys. Maybe people are not so irrational as these clever people think. Maybe they do not trust politicians not to change the rules in the future, real interest rates to become negative again, as they did under the Congress regime, or the rupee to plunge. There are only 2 ways of hedging against loss of wealth, real estate and gold. Real estate cannot be bought in small quantities, entails huge taxes, cannot be smuggled in to meet demand and cannot be hidden in lockers. Gold is perfect and jewellery can be claimed as family heirloom. It is not just the government, 80% of people think business fellows are crooks and so do not invest in the stock market. Risky investments, meaning in stocks, fell from a high of 10.7% in 1996 to 3.8% in 2014. We are being constantly advised that investing in shares gives the highest returns over a period of years. Does it? They trick us by highlighting the indices, namely the Sensex and the Nifty. What they do not tell us is that the constituents of the indices keep changing, the loss making companies being replaced by those which are profitable. From January 2008 till now, shares in over 300 firms have lost 90% of their value while the Sensex has risen by 32.85% in the same period because 469 stocks have doubled in value. Koutons has dropped from Rs 1000 to Rs 2.45. Imagine the losses to shareholders. According to one analyst bonds have given better returns since 1991. The share market is too complicated for stupid retail investors, so invest in mutual funds, we are told. Alliance Capital Mutual Fund, a subsidiary of Alliance Capital of the US, has disappeared. The only solution is to increase trust of the people by promising not to trick them, but then who knows which party will win elections in 2019. And therein lies the nub.