The statistic is as much cultural commentary as it is economic fact, a testament to gold’s unwavering hold on the Indian psyche, even as the country is on its way to becoming the world’s third-largest economy.“It’s a striking statistic that invites deeper reflection rather than literal comparison,” Dr. Manoranjan Sharma, chief economist at Infomerics Valuation and Ratings at ET Markets. “While GDP is a variable and gold ownership is a stock, the contrast nevertheless highlights the extraordinary cultural, financial and psychological importance of gold in the Indian economy.”
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Wealth effect?
Morgan Stanley had noted in an earlier report that “the stock of gold has a positive wealth impact on household balance sheets, which also benefits from cyclical factors such as lower interest payments amid monetary policy easing and a positive impact on disposable income through direct and indirect tax cuts.”
However, not everyone agrees with this statement about the prosperity effect. Historical analysis of gold rallies by Emkay Global challenges conventional wisdom. The firm analyzed three significant gold rallies over the past fifteen years and found no material macro impact on consumption. Emkay attributes this to behavioral characteristics: households treat gold as a combination of consumption and long-term savings, with 75-80% of gold investments being in jewelry. Holders rarely value their gold holdings, unlike financial assets, so there is no wealth effect at play, said Emkay economist Seshadri Sen.
India remains the world’s second largest consumer of gold, accounting for about 26% of global demand, just behind China at 28%. According to the World Gold Council, India’s share rose from a five-year average of 23% to 26% by June 2025, on a four-quarter basis.
While jewelry accounts for the majority of demand, roughly two-thirds, the share of bars and coins as retail investment vehicles has soared over the past five years, from 23.9% in June 2020 to 32% in June 2025.
The Reserve Bank of India (RBI) has also joined the gold rush. The central bank has added about 75 tonnes to its reserves since 2024, taking its total holdings to 880 tonnes, which now accounts for about 14% of India’s total foreign exchange reserves, according to Morgan Stanley.
Dr. Sharma traces gold’s appeal to its historic role alongside the US dollar as a global safe haven. “For nearly eight decades, since the emergence of the Bretton Woods financial architecture, gold and the US dollar have occupied a unique position as global safe havens,” he explained. “During periods of heightened global or domestic uncertainty – wars, financial crises, inflation episodes or geopolitical tensions – investors and households are instinctively drawn to these two stores of value.”
Silver has also recently re-entered this privileged category, due to “a growing distrust in fiat currencies and financial systems, especially during periods of aggressive monetary expansion by central banks,” Sharma said.
The paradox of gold
Yet gold poses a policy conundrum. “From a purely economic point of view, gold is largely a useless and unproductive asset,” Sharma said. “It does not generate income, increase productivity or directly contribute to capital formation.”
Policymakers recognize this and have repeatedly tried over the past two decades to shift household savings to financial alternatives such as gold ETFs, gold government bonds and digital gold. “However, these initiatives have had limited success,” Sharma noted. “The deep-seated preference for physical gold – driven by tradition, tangibility and trust – has proven difficult to overcome. For many households, gold is not just an investment, but a form of security, insurance and social currency, especially in times of need.”
Central banks are fueling the rally
The record prices reflect more than just household demand. “Another major factor driving gold prices to record highs appears to be aggressive accumulation by central banks, especially the People’s Bank of China,” Sharma said. “According to press reports, the Chinese central bank has been purchasing gold in large quantities, using its substantial financial resources.”
This reflects a broader strategic shift. “Several countries are diversifying their reserves away from the US dollar, reducing exposure to geopolitical risks and strengthening monetary sovereignty,” he explained. “Such large-scale, sustained demand from the official sector puts upward pressure on global gold prices, reinforcing its status as a strategic asset rather than merely a commodity.”
Macroeconomic implications
The size of India’s gold holdings has significant economic implications. “Large imports of gold impact the current account deficit, affect exchange rates and limit the transmission of monetary policy,” Sharma noted. “At the same time, gold acts as a shadow financial system: it provides liquidity through gold loans when formal credit access is limited.”
This dual role underlines the complexity of the issue. “Understanding this phenomenon requires us to go beyond simplistic judgments and appreciate gold’s complex role as both a financial asset and a deep-rooted social institution,” Sharma said.
He concluded with a forward-looking question: “It remains to be seen how and to what extent we will be able to ‘unlock’ the value of gold to drive the process of India’s economic growth and structural transformation in line with its stated goals of development.”
Right now, as gold prices rise and household wealth soars, India’s $5 trillion gold treasure is as much an economic puzzle as it is a cultural icon – a shining reminder that some traditions are proving more enduring than the most advanced financial techniques.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times)
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