The government sees in the yellow metal a detriment to the nation’s economy. Addressing a meeting of Indian Banking Association’s annual general meeting in Mumbai on Thursday, finance minister P Chidambaram urged banks to discourage their customers from investing in gold. He also said that banks should stop selling gold coins.

“Banks have a role to play in dampening the enthusiasm for gold,” the finance minister said. The government seems to have woken up quite late to the fact that banks have been encashing on the average Indian’s infatuation with gold. Cultural factors, such as festivals like Deepavali and Akshaya Tritiya, both considered auspicious occasions to buy gold, have led to a spurt in purchase in the recent years which has caused a rocketing of India’s imports of the metal.

In March this year, in an interview to Governance Now, KC Chakrabarty, deputy governor of the central bank – Reserve Bank of India, said, “Most of the gold lands up either in moneylenders’ coffers or temples or it is handed down the generations. It has no productive use in the economy.”

For years, tales of investment in gold and how India was major market for the metal have abound. It s deeply ingrained socio-cultural practices with wedding seasons seeing the maximum purchase of the metal. In fact, India’s love for gold is ancient as the Indus Valley civilisation, (circa 2500 BC), when people wore gold jewelry. The Gupta dynasty (250 AD) is known as the Golden Age, when gold coins were circulated widely.

As the current account deficit (the gap between foreign currency income from exports and outflow from imports) ballooned in recent years, the government is seeing red over the yellow sheen. India’s current account deficit touched a record 6.7 percent of gross domestic product in the October-December quarter.
But why is gold being made such a villain? Twenty two years ago, when our economy was tottering, it was this yellow metal which rescued it from a probable collapse. India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland in 1991 to raise $600 million to tide over payment obligations.

Not only that, the yellow metal has rescued several households during crisis. In the last few decades, gold has been used as collateral for loans especially for the home loans. Such schemes were also promoted by private and public sector banks aggressively. If the government was so wise, why didn’t it stop banks from doing so when they started?

In fact, it is the same UPA government (which is now advising Indians not to buy gold) that went ahead and bought gold from the international monetary fund (IMF). In 2009, when the IMF started limited gold sales programme, it was the RBI which bought 200 tonnes of gold valued at Rs 31,490 crore ($6.7 billion). At the time, many analysts hailed it a ‘course correction’ of the 1991 decision of the government. The RBI’s move was not bizarre because dollar was weakening and the apex bank built its reserve on gold to shift away from holding assets in dollars.

In the last few years, the UPA government, facing heat from different crises, be it the several scams or Anna Hazare’s movement on Jan Lokpal, has always found a villain to pin the blame on. On the 2G scam, it had a villain in “Vinod Rai’s (former CAG) notional figures of losses”. Now with growing current account deficit, the villain is the “yellow metal”.

However sensible the advice from the government may be, the quintessential Indian hankering for gold is not something that can be easily overcome. Government can ask its banks to stop selling gold coins but it can’t stop festivals like Akshaya Tritiya, Dhanteras where gold purchases gets upswing or even in marriages where giving gold is considered a staple.