Will India's gold import restrictions affect credit in India?

Why is gold so important in India?

India is the largest gold importer in the world, yet the government continues adding limitations to importing gold into the country

Many factors—including low credit and the continued depreciation of the Indian Rupee—have led the government to instill several gold importing restrictions since the beginning of the year. It seems now that every few weeks, the government has issued new or updated restrictive measures to curb gold imports. In particular, the recent flat-out import ban of gold coins and medallions seems excessive.

India vs Gold 2013-08-19Enlarge Graph

Why is gold important?

Gold is important as a storage of value and within Indian cultures as a raw material for jewelry. Many Indian citizens prefer to buy and store gold rather than put their money in banks, which in turn means banks have fewer reserves and can lend out less money.

The lower amount of money lent means that credit is more expensive to come by, leading to a more restrictive credit environment and therefore less investment by companies. This lower investment results in lower growth, which reduces wages, employment, and GDP.

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