As gold in India’s physical market has been trading at a 20% premium to the London spot price, I have been suggesting to those who can do so that they sell their gold in India and buy it back in the international market. This would effectively create about 15% in a relatively risk-free trade. I think Indian gold will eventually settle at a premium of about 5% once the dust clears.
It constantly amuses me how different reality can be from what one sees in the media.
For several months, the media has been reporting a shortage of gold in the Indian market. But what is it actually like to sell physical gold into this so-called shortage? Not easy.
One has to sell through select, close contacts. Why? Because a sort of seller’s cartel has come into existence. The politically connected and the mafia have been pressuring traders to buy from them rather than from the general public.
The gold market was rather weak during the festival season. As I wrote earlier, India faces severe monetary problems: the risk of devaluation and chronic inflation exceeding 9%. India also has severe economic problems: stagnant growth and a falling savings rate. Without growth, Indians will increasingly lack the capacity to buy more gold, however much they may crave it, due to monetary uncertainty.
I can get a manual worker to do hard labor for less than $5 a day, and the rate is even lower in rural areas. Superficially, it seems that the Indian rupee should strengthen, or at least that Indian exports should rise significantly. In reality, neither is happening. The Indian market is flooded with Chinese goods.
Why?
Indian workers are extremely badly trained. Worse, they cannot learn properly, because they process the world through Hinduism. If I tell a worker to do five things in order, he will invariably fail to do them. If he cannot even perform a linear task, how can he perform a complex one?
India has massive structural problems. The cost of making anything, despite very low labor costs, is extremely high. As soon as one moves up the value chain, Indian costs rise exponentially, making Indian exports uncompetitive.
On top of this, India’s regulatory regime is horrendously corrupt and heavy-handed—worse than ever. I have been talking with many businesspeople about how things work. Recently, a food manufacturer in Bhopal was shut down because the authorities claimed to have found “adulterated” food at his premises. They destroyed the food. The court will accept the authorities’ word as final. The businessman will likely pay a large bribe to avoid going to court.
Now you can see where some of the costs are. You can also imagine how this businessman will make up for them. Will he now actually adulterate? You bet he will.
People tell me that electricity officials, tax officials, and a plethora of other agencies can pretty much walk into your home whenever they want. No one has the courage to stop them. Of course, a lot of crime happens under that pretext.
To those who tell me that I am too negative about India, I can only say this: I would find it absolutely suffocating to be economically active here.
So when will India change? Again, I could not be more pessimistic. Not unlike a deer that has just been chased by a lion, Indians carry no memory of the constant humiliation they face. They never fight. They never feel moral outrage.
I would expect India to start improving only when either people begin hanging their public servants in the public square or when the country starts falling apart because of starvation and other problems. I am betting on the latter.
Really, the former is a rhetorical statement. The public servant is only a symptom. The source is Indian culture.