Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Gold is so popular in India that it's created an economic problem for Prime Minister Narendra Modi.

The country vies with China as the world's biggest buyer of gold jewelry, thanks in large part to its cherished status in marriage ceremonies. Imports of the metal came to $35 billion last year, and were equivalent to about 43 percent of the country's current account deficit in the September quarter. In November, Modi launched a program to lure private gold holdings onto the market by getting banks to offer interest on items deposited in their vaults.

You're Indestructible
India's current account deficit has shrunk, but gold imports remain stubbornly strong
Source: Bloomberg data

If he really wants to limit the amount of gold imported into the country, 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, according to the country's Geological Survey. Since then, production has slipped so dramatically that the likes of Sweden, Nicaragua and Kyrgyzstan are bigger miners. According to the Geological Survey, about 80 percent of the country's gold output in 2006-2007 was a by-product of smelting imported copper.

You'd think, given this backdrop, that 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 Bloomberg's Swansy Afonso, Rajesh Kumar Singh and Archana Chaudhary 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, movies or venture capital, there are a long tail of failed investments behind every blockbuster. While miners worldwide have been cutting back on exploration costs because of the slump in commodities prices, they'll still spend about $8 billion in 2016, according to SNL Metals & Mining. The only reason companies risk this capital is because they hope to get first refusal on the right to dig up what they've found.

India has long-standing problems with corruption around the free allocation of mining leases, which helps explain the desire to change the law. But doctors need to be careful they don't administer medicine that's more harmful than the disease itself. If a country can only stop corruption in mining by removing the industry's incentive to develop new mines, it's guaranteeing a future of rising import dependence.

This is a problem that goes beyond gold. China greeted its economic growth with a drive to increase domestic production of almost every raw material. Gold production has jumped four-fold over the past two decades, making China the world's biggest miner of the metal. That's left it less dependent on imported materials and less exposed to foreign capital flight, thanks to a current account that's been in surplus for decades.

No Medal Winner
China's gold production has jumped four-fold over the past two decades. India's has stood still.
Source: World Bureau of Metal Statistics, Bloomberg data

Of course, it's possible that India simply has a poor endowment of gold that was all tapped early in the 20th century. Mines, like oil wells, eventually run dry. And as anyone who's visited the ghost towns of Western Australia or California's Sierra Nevada can testify, a history of gold mining doesn't necessarily indicate a future of gold mining.

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 in the ground, or a lack of capital to develop them. Only about 13 percent of the country's 575,000 square kilometers of land with geological potential has been explored in detail, according to the Indian Mineral Federation. The country could be sitting on a gold mine, and not even know it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net