Why Uday Kotak believes equity beats gold investments

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Gold has historically been a favoured asset class for Indians but billionaire banker Uday Kotak believes there should be a new policy that will reset investor priority to equity, a more productive asset than the precious metal.

Kotak said in a series of tweets on Monday why pouring Indians’ savings into gold was not good for the health of India’s economy. He said net gold and precious stone imports between 2011 and 2019 scaled ₹245 billion, while net inflows from foreign portfolio investors (FPIs) in debt and equity was only $145 billion during the period.

“Hence we net exported $100 billion domestic savings into gold etc while foreign savers bought into our top companies. FPIs generally avoid small and mid caps. A good trade for India?,” Kotak said in the tweet.

Kotak’s argument highlights the importance Indians attach to gold, which also determines their risk perception about various asset classes. Non-financial savings such as gold and real estate have traditionally been favoured by Indians over equity investments for emotional reasons. Unlike domestic savings that go into equities, FPI inflow into equities is believed to introduce some volatility into the market as their investment and exit decisions often depend on a host of global events and other pressures they face. Also, the risk perception about capital market investments is one reason why Indians prefer physical assets.

Gem and jewellery imports inflate India’s import bill, pushing up the trade deficit. In the April to June period, the country imported gem and jewellery worth $18.6 billion, about 68% of the trade deficit of over $27 billion during the period. Other big contributor include crude oil, which explains the government’s efforts to promote electric mobility.

Gold fetches financial returns, but it is an unproductive asset, according Kotak. “We Indians love it and export domestic savings to import gold. Country runs current account deficit. Huge gold stock with individuals, temples. Time for new gold policy. Recirculate local gold and reduce imports as early as possible,” Kotak said.

“For India, domestic equity investment (is) superior to gold import,” he added.

One factor that comes into play in equity investment decisions is how transparent businesses are and how well they govern themselves. The Sensex, which was at 36,699.84 on 5 August, was ruling at 36,814 in afternoon trade on Tuesday. The price of 24 carat gold, which was at ₹35,640 per 10 grams on 3 August had surged to ₹38,910 on 2 September in Delhi.