In gold we trust.

"Nearly 18 months after it was first launched, the Narendra Modi-led government's gold monetization scheme is yet to find many takers," wrote Tadit Kundu. People have given up only 6,410 kg of the gold they possess, less than 2% of annual import of the metal in 2016. From April to January India imported 546 tonnes of gold, the total import in 2015-16 was 968 tonnes. The government estimates that citizens and temples in India hold a total of 20,000 tonnes of which they have managed to get their hands on 6.41 tonnes. Why do Indians love gold? A survey showed that about 35% of people feel that 2-3% of interest on gold deposits is satisfactory and would not mind giving up what they possess but 40.66% of people said they were not interested. Interestingly, Indians use gold as collateral to borrow money from banks and private moneylenders, but are reluctant to trust the government. Since most of the gold is held in the form of ornaments it gives women some control over part of household assets, and since gold is fungible, it can help in an emergency. The US holds 8,133.5 tonnes, almost all of it is held by the Federal Reserve. Why do Indians hoard gold when the per capita income here was a meagre $1570 in 2013, whereas average wages in the US in the same year was nearly $45,000? Probably because Indians do not have any trust in the government or in the currency, the rupee. This is not something that most people will admit to but if 40.61% of people say that gold provides security, 32.08% say that it will appreciate in rupee terms and 11.36% say that it is liquid, making a total of 84.05% who would hoard gold even though it just sits in bank lockers and does not provide any income. Why? Because the rupee loses value. In 1966, 1 dollar bought Rs 7.5, today it buys about Rs 64. Why? Because prices rise much faster in India than in the US. Central banks of all western countries target an inflation rate of 2% , whereas India has a target of 4%, plus/minus 2%. That means, the government would be comfortable as long as consumer prices are rising at less than 6% per year. Inflation helps the government reduce its debt load by increasing tax collection as higher prices generate more VAT and higher wages pay more income taxes. The government is set to borrow Rs 3.5 trillion this year. The sudden demonetization of high value notes has eroded trust in the currency even further. The government needs to spend a lot of money to create jobs but that will raise prices. If it doesn't growth will be subdued. We may not understand macroeconomics but this uncertainty makes people nervous. Better to hold on to gold.