India's Costly Love Affair with Gold ; Money Spent on Gold Could Be Cutting the Country's Economic Growth by 0.4 Percentage Points per Year

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In India, nearly all that glitters is, in fact, gold. With a stockpile already worth $200 billion, Indian gold purchases jumped nearly 40 percent this year, making the country the world's leading consumer of the precious metal.

Gold may seem like a savvy investment as its value hits a 22- year high. But experts say it may actually be weighing down one of Asia's fastest rising economies. It would be better if the money locked up in the glistening yellow metal went instead to finance new start-ups or better roads, boosting the Indian economy over the long term, economists contend.

That could provide quite a boost, given that the amount Indians have saved in gold - mostly as jewelry - is worth 30 percent of the country's $690 billion economy. But Indians have a deep cultural soft spot for the soft metal - something that may hinder new efforts to introduce more modern investment strategies for India's burgeoning middle class.

"It's fair to say India's economic growth would be higher if the money tied up in gold was invested more productively," says Diana Farrell, director of the McKinsey Global Institute in San Francisco.

Chetan Ahya, a Morgan Stanley economist in Bombay, has put a number on how much higher growth - roughly 0.4 percent each year. This may sound like a small quantity of growth to forgo, but in reality it translates into billions of dollars in lost wealth annually. The cumulative amount lost year after year was "huge," Mr. Ahya wrote in a report earlier this year.

Despite this, there is no sign yet of a substantive cooling in Indians' longstanding ardor for gold. In fact, the precious metal occupies various important cultural roles in Indian society, which augment its function as an attractive repository.

For instance, gold features prominently in ancient Indian religious epics, such as the Ramayana and Mahabharata. In Hindu marriages, brides always wear a special gold necklace. When the marriage produces a child, the newborn has a golden ring placed upon its lips for luck. In some parts of India, the baby's ear is pricked with a golden pin. Many Indian prayer ceremonies often feature small gold objects, too.

Aside from its ceremonial uses, Indians typically view gold as a safe investment, particularly since it is portable and can be converted into cash easily. "It's one of the most secure forms of savings in rural areas, especially for women, since banking services aren't always extensive or secure," says Jill Leyland, a London- based economist at the World Gold Council, which promotes the metal.

"For example, earlier this year there was a mini gold rush in Tamil Nadu, where people affected by last year's tsunami put up to half the aid money they had received into gold jewelry," Ms. …

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