To limit gold import, government needs to make domestic production easier

By David Fickling

Gold is so popular in India that it’s created an economic problem for PM Narendra Modi. The country vies with China as the world’s biggest buyer of gold. Imports of the metal came to $35 billion last year, and were equivalent to about 43% of the country’s current account deficit in the September quarter. In November, Modi launched a programme to lure private gold holdings to the market by getting banks to offer interest on items deposited in their vaults.

If he really wants to limit the amount of gold imported, here’s a smarter way of doing it: Make it easier to produce the stuff domestically.

At the start of the 20th century, India was the world’s sixth-biggest gold producer. Since then, production has slipped dramatically. You’d think the government would be doing everything it could to encourage local miners.

Far from it: Deccan Gold Mines, which hasn’t dug up an ounce in 13 years because of the difficulty of obtaining permits from state governments, told that it has no incentive to explore for gold after laws passed last year forced miners to bid for the right to mine the deposits they find. Finding mineral deposits is risky, cost-intensive business. As with pharmaceuticals or movies, there are a long tail of failed investments behind every blockbuster.

India has long-standing problems with corruption around the free allocation of mining leases, which helps explain the desire to change the law.

The problem at the moment is that without robust private-sector exploration, it’s hard to be sure what the problem is: A paucity of resources on the ground, or a lack of capital to develop them. Only 13% of the country’s land with geological potential has been explored. It could be sitting on a gold mine, and not even know it.