AAP's Case for Lower Electricity Tariffs in Delhi

My article with this title appears in the Feb 22, 2014 issue of the Economic & Political Weekly as a commentary. It is reproduced below.

The Aam Aadmi Party (AAP) announced a 50% subsidy for electricity consumers using under 400 units a month within a few days of forming its government in Delhi. While the major political parties criticized the move, the state governments of Haryana and Maharashtra quickly followed suit announcing their own subsidies.

There is a strong public perception in Delhi that bills are inflated and that electricity distribution companies (discoms) have managed this by installing fast running meters and obtaining tariff increases by dubious means. The stiff resistance of the discoms to providing information under the RTI Act or to submit to a CAG audit served to strengthen this perception.The former Delhi Government also compromised itself in the public eye by stonewalling a CAG audit.

The AAP’s election promises spoke to these public concerns and its government has taken steps to fulfil them, including pushing for a CAG audit.AAP’s expectation is that the audit results will provide grounds for reducing the tariff. The subsidy has therefore been announced only for three months and its impact is less than 1% on the Delhi budget.

This commentary takes a critical look at the case made out by AAP for an audit of the discoms and lower tariffs after providing a brief introduction to the tariff fixing process. For more details on the subject of tariff determination as well as the disaggregated components of tariff of Delhi discoms, the reader is referred to Kasturi (2013).

Electricity distribution in Delhi, with the exception of the New Delhi Municipal Council area and the cantonment, is split between the Tata Power Delhi Distribution Ltd. (TPDDL) belonging to the Tata group, and BSES Rajdhani Power Ltd. (BRPL) and BSES Yamuna Power Ltd. (BYPL), both belonging to the Reliance ADAG group.

The tariff process requires the discoms to submit a multi-year plan to the Delhi Electricity Regulatory Commission (DERC) stating their annual revenue requirement that includes the cost of power, operation and maintenance expenses, depreciation, and a guaranteed return on capital employed. After review, the DERC approves the requirement for each utility and fixes a tariff structure that will enable all the utilities to meet their revenue requirements.

The actual performance of a discom in any year may differ from plan because of factors beyond its control. The discom gets an opportunity through a ‘true up’ petition to the DERC to ask for recognition of variation in expenditure and revenue from plan. The DERC, after validating the discom’s claims, issues a ‘true up’ order that spells out the revenue requirement and the revenue actually realized from sales that year, as recognized by the commission. A gap between the two provides the case for a revision of tariff.

‘True up’s’ happen after considerable delay. Discoms in Delhi submit their ‘true up’ petitions for any year, only a year later. The DERC then takes several months to arrive at its order. The last true up orders for Delhi discoms (as of writing in Feb 2014) were passed by DERC in July 2013 and square up the accounts of 2011-12.

For better clarity, the revenue requirement of the discom may be represented by its average cost per unit of power provided to the consumer. This cost is composed of the cost of the power procured, the cost associated with distribution loses (due to theft or technical loss) and the cost of distribution (including the profits guaranteed to the discom). The latter two, clubbed together is termed ‘distribution overhead’ in this commentary. The revenues realized by the discom from electricity sale may be represented, similarly, by an average billing rate.

Table 1 illustrates the average operational costs and billing rates for the three Delhi discoms for 2011-12. The discoms used the gap between average billing rate and operational cost to press for higher tariffs. We will proceed to examine in detail each component of cost and the revenue along with AAP’s contentions about them.

Table 1: Average operational costs and billing rates of Delhi discoms for 2011-12

	TPDDL	BRPL	BYPL
Power purchase cost A	5.10	5.15	5.30
Distribution overhead B	1.61	1.96	2.50
Total cost C = A + B	6.72	7.10	7.80
Billing rate	5.24	5.16	5.11

All costs and rates are in Rs/unit; Power purchase cost is based on total number of units available at the discom network periphery. Other costs and rates are based on total number of units billed to customers.

Source: Respective 2011-12 ‘true up’ orders

Energy purchase and sales

The bulk of Delhi’s power requirement is met through long term purchase agreements with generation plants in the central and state sectors. Discoms enter the short term power market to meet peak loads and sell surplus power during lean periods. Table 2 shows the power purchase costs for TPDDL and BRPL.

Table 2: Power purchase cost of TPDDL and BRPL

		2008-09		2009-10		2010-11		2011-12
		%age	Rate	%age	Rate	%age	Rate	%age	Rate
NDPL	Long term purchase	89.7%	2.59	80.2%	2.81	82.4%	3.20	92.7%	3.88
	Short term purchase	10.3%	4.35	19.8%	5.25	17.6%	5.56	7.3%	3.93
	Transmission costs and losses		0.33		0.42		0.48		0.82
	Surplus sales	11.3%	5.00	9.4%	4.11	12.7%	2.96	18.2%	2.94
	Net for customers	88.7%	2.86	90.6%	3.68	87.3%	4.25	81.8%	5.10
	Cost escalation due to short term trades	-1.8%		14.7%		16.4%		8.4%
BRPL
	Long term purchase	91.1%	2.57	81.5%	2.81	80.9%	3.20	87.6%	4.04
	Short term purchase	8.9%	4.54	18.5%	5.36	19.1%	5.12	12.4%	3.69
	Transmission costs and losses		0.36		0.38		0.55		0.80
	Surplus sales	9.2%	5.17	13.8%	3.66	18.0%	3.21	18.0%	3.23
	Net for customers	90.8%	2.89	86.2%	3.66	82.0%	4.31	82.0%	5.15
	Cost escalation due to short term trades	-0.8%		15.6%		15.7%		6.2%

Rates are in Rs/unit

Source: DERC ‘true up’ orders

Up till 2008-09, surplus power was sold at high rates and more than made up for the higher cost of short term purchases. In 2009-10 and 2010-11, this situation was reversed. Discoms bought larger amounts of short term power at high rates and sold surplus power at lower rates leading to an overall increase in the cost of power of 15-16%.

Based on the high rates obtained for surplus power in 2008-09 and projecting a greater surplus for 2010-11, the DERC in May 2010 was on the point of issuing an order reducing tariffs. The discoms complained against this to the Delhi Government which promptly stopped the DERC from making the order. The High Court, hearing a challenge to this government intervention in the DERC’s work, ruled a year later directing the government to desist from such interventions in future and asking the DERC to proceed with a new tariff order.

The DERC, by now under a new chairman, was presented with the 2009-10 accounts by the discoms which included huge overruns in power purchase costs. It accepted these cost overruns without questioning and increased tariffs through its tariff orders of August 2011.The above events are at the centre of AAP’s assertion that the tariff increases since August 2011 are unjustified.

A year later, in July 2012, the DERC acknowledged irregularities in power trades of the discoms in the ‘true up’ orders of 2010-11 accounts, stating that:

 “a competitive bidding process was not followed and power has been contracted on the basis of request for offers from traders (through verbal communication). As such, there were no supporting documents to validate the selection of the contracts against all the offers that may have been received” (BRPL) and

“Contracts for short term power purchase were finalized very early in the year and for most of them, competitive process was not followed…..it appears that that no efforts were made to sell through exchange or bilateral sources where better yields are expected.”(TPDDL)

After making these observations, the commission was content to rest the matter with the advice to the discoms that “there were scope for better management of the process of short term power purchase and sale of the surplus power so as to significantly promote the interests of the consumers.”

Another year on, things had still not been set right with power trading as is visible in DERC’s stricture to BYPL in Aug 2013:

“Contracts for sale of short-term power were finalized early in the year and no competitive process seems to have been followed. It is noted that substantial quantum of short-term power was sold through Exchange and UI…..”

These were not the only disquieting practices in power trades. Power purchases and sales of the discoms were often mediated by power trading companies including those belonging to the Tata & Reliance ADAG groups and the ultimate seller / buyer was not revealed.

Clearly the discoms at a minimum were not putting in their best efforts to manage power costs. This would not be surprising, given that the cost of power is a pass through to the customer. The AAP alleges worse - that the discoms converted what should have been a revenue surplus from sale of surplus power into losses in their books. Its election manifesto contains a promise to make the buying and selling of electricity by the discoms transparent and to take steps to bring them under the RTI Act.

Distribution overheads and average billing rates

Distribution overhead has two components as explained earlier – the cost associated with distribution losses and the distribution costs. Table 3 shows the distribution losses and the distribution overheads over the years for the Delhi discoms and for BEST, a public sector Mumbai discom. All four are of comparable size having between 1.1 and 1.7 million customers.

Table 3: Distribution losses and distribution overheads of discoms

		2007-08	2008-09	2009-10	2010-11	2011-12
TPDDL	Loses	20.72%	19.00%	16.51%	12.39%	11.63%
	Overheads	1.79	1.61	1.94	1.55	1.61
BRPL	Losses	30.89%	21.47%	20.08%	19.64%	18.94%
	Overheads	1.97	1.45	1.95	1.92	1.96
BYPL	Losses	33.42%	24.93%	24.90%	23.40%	22.71%
	Overheads	1.85	1.51	2.29	2.35	2.50
BEST	Losses			9.35%	8.01%	7.69%
	Overheads			1.75	1.70	1.86

Overheads are in Rs/unit and based on the total number of billed units

Source: DERC true up orders for Delhi discoms; MERC for BEST

While the three Delhi discoms had comparable overheads in 2007-08 and 2008-09, BYPL started showing much higher overheads than TDPL from 2009-10 and BRPL the same from 2010-11. These two companies failed to progressively cut down distribution losses, a major reason for their high overheads. Their losses were much higher even in comparison to BEST, a public sector company operating in Mumbai city.

At the time of the privatization of electricity distribution in Delhi, the major benefit held out was that distribution losses would be dramatically cut down. The disincentives for not meeting the distribution loss targets do not seem to have worked for these two discoms.

So what is the reason for BRPL and BYPL failure to cut down their distribution losses?

The AAP alleges that the Reliance ADAG group discoms have been manipulating accounts showing lower billing (and revenue collections) in their books; consequently the calculated distribution losses turn out higher than what they actually are. A higher distribution loss pushes up the cost of power available for distribution to the consumer while lower collection pushes down the average billing rate. A larger gap between the two (see Table 1) would allow a discom to make a case for a larger tariff hike.

In support of its allegations, the AAP has drawn attention to the sudden increase in distribution losses in a number of circles of BRPL in 2010-11 reversing the steadily decreasing trend of several years. It has also pointed to the extremely damaging findings of the DERC during the validation of the 2010-11 billing of BRPL and BYPL.

The commission found numerous instances of customers with zero consumption or zero rate billing and many customer categories with average billing rates lower than the prescribed tariff in a sampling of the billing database of these two discoms. Summing up the validation exercise in connection with BRPL the commission noted:

“The information provided by the Petitioner during the entire validation session was inconsistent and changed many times. …. the Petitioner could not provide clarifications to the satisfaction of the Commission.”

The findings of the DERC from the validation exercise relating to the 2010-11 true up throw up the question of how a regulator should deal with a discom if data presented for a true up petition is unsupported by evidence or does not stand up to scrutiny. DERC penalised BRPL by an estimated Rs 52 crores in 2010-11, just over 1% of its revenue requirement for that year. The AAP would have the regulator take stringent action, including prosecution for cheating, in case of serious discrepancies in the accounts presented to the commission.

A visit to the DERC website, the repository of all data relating to tariff fixation, is utterly disappointing. There are no metrics or time series data available to help the public judge the performance of discoms. The latest true up petitions of the discoms of 2013 that would contain all the data submitted to the DERC, are not available. The most recent minutes of the meetings of the ‘State Advisory Committee’, a body mandated under the Electricity Act to advise the commission on matters including “protection of consumer interest”, date to Oct 2011.

The discoms have provided enough grounds through their questionable accounting and power trading practices to justify an independent audit of their accounts. In Delhi, they are monopoly providers of an essential public good using infrastructure set up in the course of decades by the state. Leaving aside legal merits, it is entirely reasonable that they come under the ambit of CAG audits and the RTI Act.

The issue however goes beyond an audit to uncover wrongdoings of the past. How are consumer’s interests to be safeguarded in future? If consumer charges are decided on the basis of cost and a regulated profit, surely there should be transparency into the energy and financial accounting of the discoms, at least to the extent that these have a bearing on the tariff. Indeed the Electricity Act provides adequate powers to the State regulatory commissions to make regulations on the information required to be disclosed by discoms. It remains for the government of the day to find ways to persuade the DERC to bring in this transparency.

An earlier article, also published in EPW, on electricity pricing in Delhi is available here

References to this article:

An Oct 2017 Scroll.in article  

Notes on the agricultural supply chain

Credit Linkages between commission agents and wholesale traders

Traders at the Azadpur Mandi went on strike after the Delhi Government issued orders that traders at mandis have to collect 6% commission from buyers rather than farmers (See this report). Interestingly, one of the traders at the mandi is quoted in the report as saying:

“We deal in huge volumes and often sell the produce to the buyers at a credit. Sometimes they pay us off as late as four months. If we don’t take any commission from the sellers at the time of the sale, we will have no money left. Sometimes, the buyer defaults on the payment. What will happen to our earning in that case?”

The credit linkages between commission agents and buyers (wholesale traders, sub wholesalers) is another aspect of the agricultural marketing chain that leads to high markups on vegetable and fruit prices.

Vegetable prices

Another piece on the vegetable price inflation of 2013, this time published in EPW. The complete article can be downloaded from here

Onion hoarding and profiteering cycle playing out once more

In a recent article in India Together, I had used an episode from 2010 to illustrate the typical hoarding - profiteering cycle in vegetables like onion, thus:

"A vegetable like onion that can be stored throws up another aspect of this supply chain. The winter rabi crop harvested in April - May, accounts for 60% of onion production. Part of the crop must be stored to last the lean months, typically September to January till kharif harvests arrive.  Onion growers, mostly small farmers do not have the capacity to store; storage capacity is mostly with the large traders in the supply chain. Traders build up their stocks from the rabi crop and then release them at higher prices in the retail market in the lean months when demand is inelastic because of major festivals and the marriage season. This appears to be the normal seasonal cycle in the onion market.

What happens when mandi middlemen anticipate a shortfall in production? The natural response is hoarding and tightening of supplies all along the chain. The consequent price spike is typically followed by a price collapse coinciding with the next harvest. By then, the traders have already made a killing while the farmers stare at ruin.

An episode from a few years back illustrates this pattern. Onion prices climbed steeply in the months of Dec 2010 and Jan 2011 before collapsing as suddenly as seen in the graphic below. The sharply higher retail margins during the spike point to hoarding at the terminal markets.

The trigger for this episode was untimely rain which was expected to affect the late kharif crop in Karnataka, Gujarat and Maharashtra. As it turned out, onion production that year reached 15.1 million MT, the highest annual crop seen till then! Exports too at 1.3 million MT were lower that year compared to preceding and subsequent years. It appears that this is the pattern Sharad Pawar had in mind when he spoke about the current onion crisis and predicted that price would come back to normal in a few weeks.

During the next year (May-11 to April-12) average wholesale prices at Lasalgaon, the largest onion procuring mandi in India remained in the range Rs 3.90/kg – Rs 11/kg. There were reports of onion farmers in the Nasik area attempting suicide as they could not get even Rs 2/kg. This gives a lie to claims that farmers benefit from price spikes"

The same cycle is being repeated again in 2013. Onion prices have fallen to Rs 7/kg in the wholesale markets in Nasik at a time when farmers are bringing in the new crop. ( They had touched RS 100/kg in retail sales in several cities in October/November). There are news reports of farmers protesting by blocking the Mumbai Agra National Highway. The government has cut the minimum export price of onion from $1150/tonne to $350/tonne (~Rs 22/kg). Here we see the hoarding/profiteering cycle repeating again to ruin the farmers.

India's exploitative horticultural supply chain

India Together carries this article analyzing the reasons behind sudden rise and fall in prices of vegetables taking onion as an example. A typical 'price spike' episode is shown in the graphic below.

The article argues the following: 

• The per capita production of the basic vegetables of mass consumption - potato, tomato and onion - is showing a healthy increase over the decade. So it is not the case that production is not keeping pace with demand in the longer term.
• Analysis of a price spike episode shows that while weather did affect production for a part of the year in some area, the overall production that year was adequate to meet local and foreign demand.
• It appears that weather related events are not the cause but merely the excuse for pushing up prices.
• Farmers, mostly with small holdings, have little ability to store their crops to get higher prices
• The ability to hoard vegetables and sell at higher prices is entirely with the middlemen - wholesale traders and commission agents - of the mandis. While middlemen make a killing when prices spike, the farmers are at the receiving end when prices subsequently fall, as they must.
• The laws governing agricultural marketing and the middlemen-state nexus in the management of the mandis ensure that middlemen can dictate prices to both the farmer and the consumer.
• The hold of the middlemen goes beyond the confines of the mandis and extends to credit linkages with farmers, sub-wholesalers and retailers.
• The entry of corporate retail - Reliance, Mittals, etc - has not changed this state of affairs. Corporate retailers have not been able to break the hold of middlemen on farmers and meet most of their requirements of vegetables from wholesale traders rather than from farmers.

Links:

CCI commissioned study of Onion Markets

Inter-Ministerial Group paper on inflation

National Horticulture Board for price and production statistics

The pitfalls in analyzing data

The following extract warns in a light hearted manner of the dangers and pitfalls in analyzing data:

"One of the good things about open data is that the average person can verify the kind of bovine ordure that often passes for insight and inference on TV news channels. The bad thing, however, is that with more data comes the potential for a whole new wave of fallacious analyses.

For instance, has crime gone up or has crime reporting gone up? Let’s say, hypothetically, that the jail occupancy numbers from 1953 to 2012 for the State of Andhra Pradesh show a steadily rising trend with a sudden drop in the 2000s, followed by a steady rise again. You can interpret this data in many ways. 

The opposition could say that this is symptomatic of continuously deteriorating governance. The Police could say that this is proof that they are getting better at catching criminals over time. The chap in charge of prisons in the State could say that it’s indicative of his department’s commitment to increasing jail capacity all the time. The government in power during that sudden drop in the 2000s could claim that it had a Sherlockspalli Holmesreddy whose magic wand pulled the inexorable crime rate line down. The opposition then could argue that it had nothing to do with better policing but the choice to migrate government computers from MS Office to Open Office, a move that resulted in improper use of spreadsheet software thus resulting in the alleged drop in crime. I could argue that the trend correlates directly to the quality of biriyani served in prisons and that the drop in 2000 is due to a change in caterer. And finally, someone with some common sense might even ask if jail occupancy, crime reporting and crime are different things altogether."

Taken from a great piece by Krish Ashok in The Hindu

Gold imports - in whose hands do they end up ?

India Together carries this piece which is part of a series on the current economic crisis. It is reproduced below with links to data sources.

The price of gold is now as carefully followed by the Indian investor as the stock indices. Last year, Indians spent a staggering three lakh crore rupees on imported gold and jewelry. This year, the volume of imports has been higher so far and the import bill is set to break last year’s record.

Unable to offer the world adequate goods and services in exchange for its imports, India runs a current account deficit (CAD) every year. The growing deficit is responsible for the sharp Rupee depreciation of the last two years with its accompanying ills. Last year, gold and jewelry imports alone accounted for 2/3^rd of the deficit.

According to conventional economic wisdom, such a depreciation of the Rupee is actually beneficial. It will lead to a decrease in imports (because these would have become costlier) and an increase in exported goods (which would have become cheaper and more competitive) and correct the problem which caused the depreciation in the first place.

The realty is more complex. Take the case of gold imports. The accompanying table shows imports by Rupee value (last column) and the average prevailing price (middle column). Gold imports in value terms have soared despite sharply rising prices of the metal in recent years. Gold imports can be characterized as .“price inelastic” – higher prices do not lead to curbing the overall Indian demand

Gold price and imports
Year	Average Price Rs/10 gm	Imports (Rs thousand crores)
2008-09	12500	95
2009-10	14500	136
2010-11	18500	185
2011-12	26400	270
2012-13	29000	292

But gold imports are not an exception, in this regard. An examination of India’s imports over the last decade shows that India’s major commodity imports are all price inelastic, including petroleum and fertilizers. (Exploring the reasons for this would be another discussion.) If past history is a guide, rupee depreciation will not curtail the import bill.

Costlier imports from devaluation of the rupee however have extremely negative consequences for the common man, driving up the costs of essential items like diesel and gas, edible oil and pulses and fueling generalized inflation.

It stands to reason that to protect the citizen from imported inflation the government must take steps to restrict imports, particularly of items that are not in the nature of essential commodities or inputs for industry. Gold appears to be a prime candidate in this regard.

The government has been content with symbolic measures on gold such as increasing import duties, which as anticipated, has had the effect of increasing gold prices without effecting overall demand. The argument against tough measures restricting gold imports and sales is articulated by the governments’ economic advisors in these terms.

Gold, it is claimed, is an item of mass consumption, purchased by rich and poor alike and driven by deep seated social and cultural factors. (The gold stocks held in rural India are often brought up in this context.) It is hard to change the buying preferences of the mass of Indians. Restricting gold imports by any means will only result in gold coming in into the country through illegal channels and will increase the “criminality in the system”. Finally, it will also hurt the jewelry industry which employs a large number of people.

To examine the validity of these arguments, it is useful to understand who buys gold in India and for what purpose.

Gold ownership – the contrasting trends

Two sets of data serve to throw some light on Indians relationship with gold. The first is the phenomenal growth of loans against gold jewelry pledged as collateral and the companies in this business.

A Jan 2013 RBI study on gold reports that outstanding loans by banks and non banking financial companies (NBFC’s) have grown between Mar 2008 and Mar 2012 from 20,000 crores to nearly 160,000 crores at a compound annual growth rate of over 55%. The study observes that loans are taken for the short term – from 3 months to maximum of 1 year at interest rates ranging from 12% to 24% amounting to 60-75% of value of gold pledged. The majority of loans are of size Rs 30,000 to Rs 80,000. Loans are taken for agricultural purposes, or medical emergencies, to meet education expenses or on the occasion of marriages or deaths.

Gold loan customers are typically farmers, share croppers, agricultural laborers, small traders and proprietors of small scale industry. They are borrowing against gold as collateral because they do not have recourse to short term credit otherwise. The increasing price of gold makes it more attractive to pawn even the small amount of jewelry they possess. This is a section of Indian society that is pawning its gold to meet its basic consumption needs. The gold pawned can be estimated to be worth 2.5 lakh crores, not far short of 2013 imports of 3 lakh crores!

The second data set is on the quantity of gold imported and the total Rupee cost of those imports.

The accompanying figure shows the quantity of gold imports (left vertical axis) and the Rupee cost of those imports (right vertical axis) over a number of years. (The tonnage and Rupee cost of imports are taken from the Export/Import Database maintained by the Ministry of Commerce. The tonnage values reported in the website for 2002-03 and 2003-04 appear to be incorrect. For these two years, the tonnage is as reported by the RBI study referred above. Incidentally, for other years, RBI figures do not differ too much from the Export/Import database)

2008-09 marks a departure from the behavior of gold imports of previous years. The quantity of gold imports starts rising steadily (except for a slight fall in 2012-13) despite steeply rising gold prices reflected in the sharply increasing spend on gold imports.

How is this type of consumption to be explained?

A pointer emerges from data put out by the World Gold Council, an association representing gold mining companies. Traditionally, gold demand has been almost entirely from jewelry, except for a small requirement from industry. In recent years, there has been a new international trend. Physical gold (in the form of gold bars and coins) has become popular globally as a form of investment starting from 2008, coinciding with the global economic crisis. The investment demand has resulted in pushing up gold prices leading to a cycle of increasing demand and increasing prices.

A section of Indians with deep pockets has also followed the lead from around the world. There are no official figures for how much Indians invest in physical gold (in the form of gold bars and jewelry).  But according to estimates of the World Gold Council, the investment demand in India has grown from about 16% of total imports in 2003-04 to over 35% in 2012-13. The federation representing Indian jewelers (AIGJTF) estimates that 30-35% of gold imports are used for meeting the investment demand in the form of gold bars and coins. Of the approximately 1000 tonnes of gold being imported annually in recent years, 350 tonnes is for investment purposes with most of the rest going into jewelry.

The recent increased interest in gold purely as an investment is also evident from another statistics. Gold Exchange Traded Funds (ETF’s) have been available in India from Feb 2007 but they have seen rapid growth from 2009, increasing by nearly 10 times between Mar 2010 and Mar 2013. Of course, ETF’s represent only a miniscule part of the investment in gold, the overwhelming part being held in the physical form.

Incidentally, government policy over the last decade has actively encouraged gold as an investment through numerous measures including allowing the free sale of gold bars and coins by banks to retail customers, trading in the commodity exchanges with physical delivery and investment in gold exchange traded funds with long term capital gains tax benefits.

We can now return to the arguments of the governments advisors.

The fact is that while the poor may have accumulated jewelry in the past and the middle classes will still be buying jewelry for weddings, it is a small section with disposable income that is buying gold purely as an investment and they account for an estimated third of the imports. Investment gold (bars and coins), with no or little value add by jewelers, has no impact on employment in the jewelry industry. Even the main association of jewelers in India, clearly acting in its own self interest, has called on its members to desist from selling gold bars and coins. As for the fear of gold distribution through illegal channels, it is a bogey routinely raised by economists for whom the “free market” is sacrosanct. Any controls will always invite a few law breakers who must be dealt with according to the law.

It is interesting to note that a precedent for outlawing the possession of gold held as investment rests with none other than the United States. Under a 1933 decree citing national interest, Americans were forced to sell such gold to the US government at a price fixed by it. The limitation on gold ownership was removed only in 1974.

Investment in gold is used by a small minority of high net worth individuals to safeguard their wealth from the ravages of inflation, even as their acts stoke imported inflation further, making life more difficult for the average citizen. Investment in gold – whose price is dollar denominated - has to be treated as a form of “capital flight” that the country can ill afford. Any controls imposed on investment gold can be entirely justified to be in public interest.