Gold is the new FDI: a blueprint to convert India’s idle wealth into productive capital

Since the severe currency crisis of 1991, a word that has become familiar to every Indian household is Foreign Investment, or FDI. The most important role of foreign investment has been to balance our balance of payments, provide additional capital to a capital-poor economy, and support the stability of our currency. The question today is whether gold could play the same role that foreign direct investment was long expected to play.Over the past decade, foreign investment, both direct and portfolio, has amounted to approximately $400 billion. During the same period, India’s gold imports amounted to between $450 and $500 billion, which formed a substantial part of the import bill. Annual gold purchases are typically between $35 and $55 billion and constitute a large portion of total import expenditure, contributing largely to the trade balance deficit. It is clear that the inflows from foreign direct investments almost offset the outflows caused by gold imports. The problem is that these gold purchases are being held in unproductive household savings, rather than being used to create productive assets.

India is today the largest holder of gold. In 2019, the World Gold Council estimated that Indian households had accumulated up to 25,000 tons, making India the world’s largest gold holder. Indian households collectively own considerably more gold than the combined reserves of the ten largest central banks. The value of this household gold is estimated at around $3.8 trillion, equivalent to almost 89 percent of India’s nominal GDP. If this gold supply were channeled into the productive sector for capital formation, it could replace much of what foreign direct investment brings.Avoiding the outflow of nearly $500 billion in gold imports over the past fifteen years would also have significantly improved India’s balance of payments, bringing it closer to equilibrium and reducing its persistent deficit. Gold imports are among the largest items in India’s import bill and have long been a major cause of external account imbalance. Official gold exports remain low at around $10 to $15 billion, while unregistered exports are estimated at $50 to $100 billion. The result is a gold trade deficit of around $400 billion, which has had a major impact on India’s trade balance and foreign exchange outflows.

India’s total trade deficit over the last ten years is approximately $1,700 billion. Of this, gold accounts for almost $400 billion. If the gold trade deficit were excluded, the adjusted trade deficit would fall to roughly $1,300 billion, narrowing the gap significantly.

India’s attraction to foreign direct investment stems from the promise of capital, technology, global knowledge and foreign exchange. FDI introduces efficiency, innovation and international benchmarks, but much of the technology can also be purchased separately. Its most important contribution has been the supply of capital and foreign exchange, both of which strengthen the balance of payments and help control the trade deficit. Since April 2000, India has attracted approximately $750 billion in cumulative foreign direct investment, underscoring its position as an attractive investment destination. But if the true power of foreign direct investment lies in the capital it generates, Indian households’ vast gold reserves already represent comparable or greater wealth. The real challenge is not the absence of capital, but how to unlock and channel this domestic supply for productive use. If that can be achieved, dependence on foreign inflows could be reduced and India’s own wealth could become a sustainable engine of growth.

Our foreign exchange reserves include approximately $225 billion in U.S. Treasury bonds, which generate yields of approximately 4%. By comparison, gold, which accounts for about 15 percent of India’s foreign exchange reserves, has delivered a compound annual growth rate of over 12 percent in dollar terms over a ten-year period. While gold is undoubtedly more volatile and government bonds provide stable liquidity and income, the higher yields on gold are a strong argument for reconsidering reserve composition, especially for a country like India where gold reserves are significant. The paradox is illustrated by the record repatriation of almost $100 billion by foreign investors in FY25, compared to ~$90 billion in the previous year. Although foreign direct investment promotes capital formation, much of the value created ultimately flows back abroad in the form of profit repatriation and dividend payments.

Economic policy must evolve with the times. In 1991, India was in dire need of foreign direct investment. Today, however, capital is no longer scarce. On the contrary, substantial capital is now flowing out through foreign investments and repatriations. These trends reflect the growing maturity of India as a market. What is needed now is a creative mechanism to tap the vast gold reserves of Indian households and channel them into the productive economy. This would generate much-needed domestic capital while ensuring that the benefits remain within the country. This article outlines a methodology to source gold from domestic holders and convert it into productive assets.

Direct purchase of gold at a market-related but reduced price

The Government of India (GoI) may introduce a Voluntary Gold Procurement Scheme (VGPS), under which individuals can sell gold of certified purity at designated government centers at a discount of approximately 15% on the prevailing market price. The scheme would operate as a procurement program rather than a tax exemption, with the discount applied being treated as a tax on profit realization. Settlement takes place at the time of the tender, making the scheme easy to implement.

Conversion of gold value into government gold bonds with zero coupons

As an alternative to an immediate cash settlement, individuals can choose to receive compensation in the form of a Zero-Coupon Government Gold Bond (ZCGGB) with a three-year term. This structure promotes financial discipline, ensures tradability in the market and gives the government access to domestically held gold. The three-year bond would be issued at a discount that provides an internal rate of return in line with the prevailing interest rate on government bonds (approximately 6%). This obviously results in an upfront discount of almost 15%, which reflects the difference between the issue price and the maturity value.

These two schemes are simple, practical and scalable. They have the potential to convert a significant portion of idle household gold into productive economic use.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by experts are their own. These do not represent the views of the Economic Times)