Government Policy No Match For Indian’s Love Of Gold

Government regulations are no match for Indians’ love of gold.

Try as it might, the Indian government has been unable to stem the tide of costly gold imports, nor stop Indians from hiding billions of dollars in undeclared “black money” by investing in the yellow metal.

The latest attempt was a requirement that buyers of high value gold jewelry must provide their tax ID. But instead of denting demand, the move has apparently boosted unofficial trading.

Beginning on January 1, the Indian government made it mandatory for customers to disclose their tax code, known as a Permanent Account Number (PAN), for gold purchases above 200,000 rupees (a little less than $3,000). The idea was to allow the government to track large jewelry purchases, and more importantly, deter hundreds of millions of Indians outside the tax system from buying gold as a way to hide their wealth from authorities.

But Mayank Khemka, managing director of jeweller Khemka Group of Cos., told Reuters that instead of forcing transactions into the light, the law has done the exact opposite, driving many dealers to join the underground trade:

Some jewelers (are) moving to unofficial trade from official. No one wants to lose customers just because they don’t have a PAN card.”

Dealers have come up with a creative way to skirt the rule. They simply split the transaction into multiple small invoices, or issue informal receipts.

India led the world in gold consumption last year, with jewelry and investment demand increasing 6% to 890 tons. Indian jewelry consumption increased 14% year-on-year.

Indians value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system. Of India’s 1.25 billion people, only 223 million hold PAN cards.

You can see why the government wants to stop the flow of gold into these areas. The yellow metal allows people to hold on to their wealth outside the official system. But no matter what the government does, it fights a losing battle against much stronger cultural and economic realities.