Gold imports in 2011-12 were almost 2% of GDP and 9% of all imports. Economists blame gold for bloating the current account deficit to dangerous levels. Puritans moan about the import of unproductive, speculative gold. Some want stiff measures to curb lending against gold, thus reducing gold’s attractions. Much of this tirade against gold is simply wrong.

In a free society, people should have the right to buy what they choose. Gold jewellery provides immense consumer satisfaction and also serves as an appreciating asset — a rare, socially valuable combination. Well-off folk can save in a vast variety of financial assets. But the aam aadmi has limited access to banks and formal financial instruments.

Maybe the banking correspondent model will reduce these difficulties. But for a long time, most poor people will not save in conventional financial instruments and, instead, will save in silver and gold jewellery. They can borrow against this, and sell it in times of serious need. So, the availability of gold and gold loans is an important form of financial inclusion.

Once this principle is understood, many conventional objections to gold imports and loans should disappear. Efforts should continue to persuade Indians to invest in domestic financial instruments — shares, bonds and bank deposits — but not through barriers to gold purchases. Gold imports were in the range of 8-10% of all imports in 2001-02, 2003-04 and 2004-05.

So, the 9.6% ratio in 2011-12 is not exactly revolutionary (it should fall to 8% this year). Gold imports have boomed in all countries: it is a hedge against inflation and a depressed global economy. This has led to the proliferation of gold exchange-traded funds, enabling investors to buy paper gold rather than the metal. This should be encouraged. One legitimate objection is that the import duty on gold is so much lower than on other items. The import duty has been quadrupled to 4% on standard gold and to 10% on non-standard gold, but is still below standard import rates.

Unfortunately, even a 4% duty has sufficed to revive gold smuggling: customs seizures are up. Former RBI governor C Rangarajan has said that raising the duty further will be counterproductive. Another former governor, Y V Reddy, has asked, “If Mercedes-Benzes and aftershave lotions can be imported, why not gold?” I would go further. If Tata and Birla can use billions in foreign exchange to buy companies abroad though many acquisitions have been duds — why prevent the aam aadmi from also using a little foreign exchange to invest in a dollar-denominated asset like gold?

As part of capital account convertibility, Indian citizens can get $200,000 annually in foreign exchange to buy foreign stocks or property. Only the elite can take advantage of this. The aam aadmi settles for gold instead, and must be allowed to. Gold loan companies have boomed recently. Some claim to provide loans within five minutes! The RBI is worried about the mushrooming of such companies and has reduced the loan-to-value ratio for gold loans to just 60%.

Government banks giving gold loans don’t have any such limit, and so have a huge advantage over the gold loan companies. The RBI justifies this by saying banks have a diversified loan portfolio, and are less vulnerable to a collapse in gold price than the gold loan companies. Maybe so, but the aam aadmi is attached to his mortgages jewellery and will repay gold loans even if there is a crash in gold value.

Companies like Muthoot and Manappuram say that the bulk of gold loans are taken to meet emergency expenditure, and are typically repaid within a few months, maybe even a few weeks. They charge reasonable rates of interest (14-18%), far lower than traditional moneylenders or pawnbrokers. Loans are quick, and with a minimum of paperwork. So, the rise of gold lending companies has been a boon to the aam aadmi. The RBI must look at these very substantial benefits, not just the risks.

Of course, regulations are in order. Fly-by-night gold loan companies can be a problem, and must be guarded against. Precautions are required to ensure that the companies return the jewellery in full, without tampering with the gold content. But regulation should not aim at reducing gold demand. Rather, it should aim at financial inclusion by making gold loans safe and attractive. The reduction in the loan-to-value ratio has hit financial inclusion: the aam aadmi gets a smaller loan against his jewellery. The ratio should be raised to at least 70%.

Finally, let me question whether gold imports should be viewed as a current account item at all. They should be treated as capital account acquisitions, like Tata’s acquisition of Corus. The UN System of National Accounts laid down in 1993 that gold and other valuables should be treated as savings. India has accepted the UN norms. Our national accounts classify gold purchases as a form of saving. So, it’s illogical to frown on gold imports as conspicuous consumption.