Why Indians end up buying gold

India should be doing better, according to Raghuram Rajan, a professor of finance at the University of Chicago, but bad government policy keeps stepping on the country's growth and sends its citizens back to gold.

India is a BRIC country with some world-beating companies, a relatively young work force and a recognized need to modernize. But the country's efforts to grow have hit a brick wall. India's GDP shrank from 10.6% in 2010 to just 7.2% in 2011. Over the last year the Bombay Stock Exchange is down 7.69%.

Rajan argues that poor government policy steps on private business. Consequently, the supply side of the economy is not growing and inflation goes up.

. . . Indian households, worried that no asset looks safe, have taken to investing in gold. Because India does not produce much gold itself, these purchases have contributed to an abnormally wide current-account deficit. Not much more was required to dampen foreign investors’ enthusiasm for the India story, with the rupee falling significantly in recent weeks.