Guest Column

The government should announce that the interest on the gold bonds is exempt from Income-Tax and the value of gold deposited in the banks will not be liable to wealth tax in order to make the gold depository scheme a success. The government has not yet agreed to remove the clause relating to the applicability of wealth tax to gold and silver, though the proposal for the gold depository scheme includes exemption from wealth tax. The scheme was recently launched. It is surprising that the income from stocksdoes not attract wealth tax, whereas in the case of gold or silver, it is applicable.

There has been no further liberalisation of rules for the import of gold under the NRI scheme, possibly because gold has been placed under OGL. On the contrary, import duty has been hiked from Rs 250 to Rs 400 per 10 gm from January 6, 1999.

Absence of a hallmarking system is one of the major deficiencies in jewellery trading in India. At present, there is little or no protection available to customers and most of the ornaments sold do not have the purity they claim to possess. Introduction of hallmarking facility in the retail trade in India (initially on a voluntary basis) could go a long way in promoting quality control and ensuring protection to the customers. Due to the retail sale of gold imported under OGL by the banks, the need for early introduction of hallmarking is even greater.

The SBI and other nationalised banks have proposed to float a subsidiary company to establish 10 assaying centres. This way, SBIwill overcome the major obstacle coming in the way of introduction of the gold depository scheme proposed by the Finance Minister in the current budget. Gold’s performance in 1998 can only be described as disappointing. The average price of US $ 294 per ounce was the lowest since 1978 and in real terms, gold is now back to where it was in 1972. A full blown emerging market crisis, a record one day fall in Dow Jones and the sudden decline in the US dollar that resulted in the collapse of large hedge funds had placed the financial system under tremendous pressure.

Having reached a record level in 1997, gold supply contracted by 3 per cent last year to 4,123 tonnes. This came as a surprise in a year that saw mine production increase to an all time high, as well as record levels of scrap flowing to the market. Mine production did not contract in 1998, even though the environment in which the producers had to operate deteriorated drastically as the price fell to a 20 year low. Producers succeeded in cuttingtotal cash by 18 per cent to a weighted average of US $260 per ounce. As for official sector activity, central bank sales were much less in spotlight last year (1998) than in 1997.

Officially held gold found its way to the market not only through sales (412 tonnes) but also via increased lending of close to 400 tonnes. Total availability of gold excluding exports increased by 15.6 per cent to 1,200 tonnes in 1998 from 1,038 tonnes in 1997. Legal imports were provisionally estimated at 628 tonnes, a 19.16 per cent rise over 527 tonnes in 1997.

The Author is former president of Bombay Bullion Association