When I began researching why we count gold on the current account and not the capital account, I was simply seeking an answer to what looked like an illogical classification of a metal we know to be an asset. And as it is with most things, once you start pulling at a thread, sometimes you get surprised at what sits at the other end. So here is what I finally find. The question (asked in my previous column http://bit.ly/1a2YHp8 ) is this: why do we count gold imports in our current account and not the capital account? The question has been triggered by the flak households are getting for causing India’s current account deficit to get out of control due to their lust for the yellow metal. The first answer seems to be convention—we use international standards to place items in one account or the other. The logic of placing gold in the current account is that transactions in goods, even those that may have investment value, are included in merchandise trade. And that since gold does not go to work but sits in lockers and vaults – it does not qualify as an asset. Therefore, the metal’s classification as a traded “good” and not an “asset”. And, therefore, its placement in the current account.
Why do gold imports get counted in the current account and not the capital account in a country’s balance of payment (BoP) accounts? The origin of the question stems from the unfairness of the wholesale blame that Indian household gets for soaking up a quarter of the yearly world demand for gold that costs an outflow of billions of dollars from India. I hold the view that the Indian household makes a sensible decision to hoard gold. It is sensible because access to financial assets remains difficult and where access is easy, the regulatory failure to stop large-scale cheating of retail investors, as in the unit-linked insurance products that cost usRs.1.5 trillion in lost money, has broken the fledgling faith in markets for the average investor. Regulatory and institutional failure is the reason people hoard gold and not because they are stupid. And as the country looks more and more unstable, we buy more and more gold—perfectly logical and rational. This is no different than industrialists moving their business overseas and the rich buying real estate and stock abroad. Since the average household can’t do that, it buys gold. Over April, May and June 2013, Indians would have bought 300-400 tonnes of gold, a jump of 200% over the same period last year. Retail investor issues rarely wrinkle the brow of policymakers, why then this uproar over the average Indian’s fetish for gold? It worries people who get worried over the country’s finances because paying for this gold causes our BoP to get unbalanced.
OK. So there is one more acronym to remember and deal with. Jostling for space with PAN, KYC and UID is a newly born creature. Meet the little fledgling—it’s called the EUIN or the Employee Unique Identification Number. When it grows up, it will cover the three million sellers of financial products in India. To see why it was born, we’ll have to go back to the 13 September, 2012, circular of the capital market regulator (http://bit.ly/11TWCtu) that laid out the road map of change for mutual fund (MF) manufacturers and sellers. Titled ‘Steps to Re-energise the Mutual Fund Industry’, the circular used carrot and stick to get the industry to do more than chase after the wholesale part of the market. Buried in the section that dealt with the distribution of MFs was a direction to the industry association, the Association of Mutual Funds in India (Amfi), that it should “create a unique identity number of the employee/ relationship manager/ sales person of the distributor interacting with the investor for the sale of MF products, in addition to the Amfi Registration Number (ARN) of the distributor.” And that the MF application form should have a box for the EUIN.