Updated: February 25, 2015 5:14:50 am
The Union budget for 2015-16 is important because it will offer us a first glimpse into the government’s thinking on fiscal policy. This will lay the foundations for the next five years. A plan of action to correct for the previous government’s missteps is also expected. In this context, the issue of gold imports is pertinent and the government could consider liberalising them, given that global oil prices are declining, which has led to lower pressure on India’s external account. Would that be a good strategy for it to pursue? Or can an alternative like monetising domestic gold lead to greater financial inclusion and an impetus to growth as well as a long-lasting solution to gold-related problems in India?
Gold has had a unique place in India. Over the course of history, our preference for gold has been influenced by many social, economic and cultural factors. In India, gold is viewed as a liquid asset. It is widely recognised as a vehicle for the intergenerational transfer of wealth as it is considered to be the most efficient store of value. The price of gold, the amount of black money in the economy, the rate of return on and availability of alternate financial assets as well as the general price level are the main factors that determine the demand for gold. As a result of these factors, India is the largest buyer of gold in the world. The demand for this metal is expected to rise in future — given our demographics, we can expect an increase in the number of marriages as well as prosperity.
In 2012, gold imports were identified as a major cause for the widening of the current account deficit (CAD). The government and the RBI, therefore, swiftly initiated measures to curb imports. The measures were successful, and given that the CAD is now lower, gold imports are being liberalised again — though the import duty continues to be high at 10 per cent, up from 2 per cent in March 2012.
According to the RBI, irrespective of economic factors, the demand for gold as an instrument of investment as well as for jewellery is high. Import restrictions only motivate consumers to take recourse to unauthorised channels to buy gold. In the last two years, according to reports, the smuggling of gold has increased manifold, resulting in the loss of customs duty. In fact, earlier too, gold smuggling was rampant between 1947 and 1992 because imports were mostly forbidden.
To address the consistently high demand without placing pressure on the external account of the country and find a long-term solution, the government could consider tapping the existing domestic stock of 21,000 tonnes (worth Rs 63,000 billion) of gold. Earlier, the government had made an effort to tap our dormant stocks of gold through the gold deposit scheme (GDS), which was introduced in 1999. The GDS failed miserably, mobilising less than 500 kg of gold from households. This was because of the rules limiting the amount of gold that could be monetised, the time required (90 days) to assess the value of the gold, the fact that only a few bank branches were permitted to accept gold deposits and that the interest rate was less than 1 per cent, as well as the strict documentation requirements.
A better conceived strategy to encourage the recycling of gold is necessary. Going by the international experience, especially that of China and Turkey, a few options could be considered. There is a need to establish a designated corporation, which should be tasked to ensure a high quality of gold in the country, and channel gold imports through it. Also, all gold sold in the domestic market should mandatorily be hallmarked and must meet the standards set by the corporation. To establish a vibrant gold market and attract gold for recycling, assaying machines need to be provided to retailers to determine the value of gold in less than an hour. A modified and newly crafted GDS, with higher interest rates, should be extended to more branches of more banks. If banks are to become active in the gold market — and, as in other countries, they should because gold is a liquid asset — then the government and the RBI could also consider permitting banks to hold gold as a financial instrument just like they hold government securities.
The Union budget offers the government an occasion to tap gold stocks and to help recycle domestic gold by providing more schemes and offering incentives through banks to households and temples. The unearthing of existing gold stocks will help in the process of financial inclusion by encouraging people to come to banks, resulting in the operationalisation of accounts, nearly 12 crore of which have just been opened under the Jan Dhan Yojana. Monetising gold will help unlock the high volume of sealed money and could provide a boost to the economy by releasing purchasing power into the households.
The writer is RBI chair professor of economics, IIM Bangalore
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