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Too much hoarding of gold, but not enough stockpiles of oil or coal, is India's problem. While Indian households trash the rupee in a mad scramble to import a useless yellow metal priced in dollars, the government wonders how the nation can afford to pay its fuel bill. In their frantic pursuit of India's traditional store of value, citizens are worsening the country's $90-billion (U.S.) balance of payments deficit. So deeply ingrained is such behaviour – Indian farmers tend to buy gold after a bumper harvest and then sell it in lean years – that the government isn't even trying to stop the buying frenzy. Instead, it is considering a plan to direct Indian banks to buy gold on the local market and make it available to fabricators, thus reducing the ruinous cost to the country of gold imports.
More worrying is the rising cost of energy. India imports 80 per cent of its oil and the bill soared by 9 per cent in the 2012-13 fiscal year to $169-billion. Weakness in the rupee raises the cost even further to energy users and to the government, which continues to subsidize diesel on the domestic market. In the fiscal year just ended, fuel subsidies cost the government 1.6 trillion rupees (about $25.5-billion Canadian).
India now finds itself caught in an energy squeeze of increasing fuel costs and dwindling means with which to pay for it. In an effort to slash $25-billion from the import bill, India is resuming oil imports from Iran. American and European sanctions have prevented Iran from receiving payments in dollars and euros through the international banking system. The solution is that Iran accepts payment in rupees via accounts in Indian banks. Iran therefore retains a customer while India curbs its dollar purchases.
India's rupee crisis is rapidly exposing the weak foundations on which the country built the economic boom of the past decade. The country lacks the energy infrastructure to support a modern, expanding economy. A third of the country, mainly poorer rural areas, is without electricity, manufacturers are plagued by power cuts in the summer and plans to expand electricity generating capacity are confounded by political infighting over the future of India's domestic coal industry. The peak power deficit in April this year reached 9 gigawatts, or a 9-per-cent shortfall in relation to demand, due to coal shortages with 19 power stations running with stocks down to less than a week's supply.
Ironically, India has huge coal reserves but coal-mining is plagued with scandal and inefficiency. Most of India's coal is supplied by Coal India, a nationalized industry that has failed to invest quickly enough to adequately meet demand. Initiatives were take to open up the sector to private investment but instead of competitive tenders, licences and contracts were allocated to cronies of Prime Minister Manmohan Singh. There is a criminal investigation, and the allegations of corruption and under-pricing of coal act as a further drag on the development of India's energy infrastructure.
India suffers the same problem as many developing countries, an enduring obsession with preserving the value of resources in the ground – coal, gold and oil. Instead of making coal and oil available to efficient producers and selling them at open market prices, India persists in rigging the market. It needs to recognize that the economic advances of the past two decades were achieved by the creative work of Indians in software and technology, not by the hoarding of minerals.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights .
Carl Mortished