Why India Still Remains Poorest Country?

Why does not Indian Government (uncovered) short Gold within the country?

• The finance minister of India recently claimed on Google hangout that if Indians stop importing gold, half of its current account deficit will be tackled. Indian loves gold for two reason. One in gold jewelry. Two for investment. India is unlikely to be a net gold exporter ever. So there is no reason to pay an outsider for gold to accomplish the second utility. Indeed India need the real gold for the first utility, you need gold to make gold jewelry. Here is simple arithmetic.   Suppose India import $70B worth of gold every year, $50 B for jewelry and $20 B for investment. Suppose the price of gold is $1000 a unit. So 50 million units are used for jewelry and 20 million units are used for investment. Suppose Indian government can uncovered short 5 million units of gold. India then have to import only $65B worth of gold. Saving of $5B worth of foreign exchange. Now a natural question one would ask, what about the risk on uncovered short? Actually as a country as a whole, there is no risk relative to the scenario where this 5 Million units of gold is actually imported. Just plain saving of $5B of foreign exchange. Here is a calculation. Imagine USD is 50 INR (round figure, for simplicity). So a unit of gold is INR 50,000. Scenario 1: $50 B for consumption + $20B for investment. Scenario 2: $50 B for consumption + $15B for investment imported + $5B worth of gold certificate indian bought from the government. Suppose at some later time, Gold goes up in price to USD 1,200 a unit. For simplicity I am assuming USD/INR remains 50, though a similar calculation would work even if the exchange rate has changed during this time. Let us assume that the consumption is unaffected, only the investment utility of gold moved to government certificate. Now since the gold went up by 20%, Indian government might be on hook for losing $1B. Actually not, as long as 1. Indians trust their government for INR, i.e., as far as INR are concerned, Indians do not doubt the ability of paying its debt. 2. Indians are net importing enough gold for their net consumption increase. Suppose the people who had bought INR worth of Indian gold certificate now wants to sell those. So Indian government might lose $1 B, since India might now have to import 5M units of gold at $6B, whereas earlier it could have imported the same amount of gold at $5B. To make an apple to apple comparison, these Indians, who had invested in Indian gold certificate would have bought the real gold in scenario 1, and would have sell it to other Indians in that scenario for INR 300B ($6B that is).  Given the assumption that India is importing enough to satisfy its consumption needs, and people trust Indian government ability pay its debt as far as INR are concerned. The set of people who would have purchased that $6B worth of gold from other indian, if we assume that a similar fraction of investment would have been invested in Indian gold certificate in the second scenario, Indian government would have gotten this INR 300B from other set of Indian by selling 5 M gold unit of certificate. Indeed, something purchased solely for investment purpose could be assumed to be there in the hands of trustworthy party, just like most currencies are not backed by Gold standard these days (that is a separate topic whether that is good or bad, but uncovered shorting of gold is just like that trust). This calculation breaks down if India becomes the net exporter. I think that day, if it ever comes, the price of gold relative to everything else would not be golden any more. So covering the short would be easily affordable.

• Answer:

  Knowing you are short, if international speculators take gold to $10000 from the present price $1300  what will happen?