Last week, the Union cabinet introduced two schemes aimed at curbing gold imports in the country. Between 2009-10 and 2012-13, gold imports surged and accounted for nearly 30 per cent of India’s trade deficit (that is, excess of imports over exports). Gold imports were second only to oil imports and posed a massive challenge for both monetary and fiscal policymakers, because of the increased outgo of foreign exchange reserves required to finance such imports. But India’s appetite for gold has traditionally remained immune, both to increased prices and to summary import bans.
In fact, despite several tight restrictions 2013 onwards, Indian demand for gold in 2014 stood at 843 tonnes — it was not only the highest in the world but also accounted for more than one-fourth of the overall global demand. In this context, the two schemes — the sovereign gold bond scheme and the gold monetisation scheme — aim to reduce demand and boost supply respectively, without attracting further imports. However, there are several reasons why the schemes may receive a muted response, at least in the short term.
First, a large chunk of privately held gold in India is in the form of jewellery, not bullion. The sentimental value attached to jewellery is a significant hurdle in people giving up their gold. Second, as witnessed when such schemes were announced in the past, the success has often been linked to the level of tax breaks as well as amnesty against any wrongdoing in procuring the gold. Lack of such amnesty is likely to make many dither. Last, there is a fair chance that the monetisation scheme may, in fact, lead to some traders importing more gold, in the form of bullion, just in order to earn interest. In such a scenario, the public-sector banks, which are already under stress, will come under further pressure.
But even though there are questions about the immediate efficacy of the schemes, it is a welcome move by the government. For a country with one of the highest appetites for gold, the twin schemes do provide a long-term framework for managing imports. Another aspect is price moderation. Since 2000, international prices have grown at a compound annual growth rate of over 16 per cent and domestic prices have largely moved in tandem. By providing an alternative to buying actual gold, through the bond scheme, and augmenting the overall supply of gold, through the monetisation scheme, market prices will smoothen over time and contain sharp fluctuations.