In a knee-jerk reaction to the surging demand for gold that threatened to widen the country’s current account deficit, the government has for the second time this year raised the import duty on the metal by a third to 8 per cent. While it is true that India cannot afford to spend so much foreign exchange to import gold, the country’s long experience with quantitative restrictions on imports suggests this would only lead to a spurt in smuggling. Indications are that this is already happening through India’s porous borders with Nepal and Bangladesh. The government must keep a watch on gold banks which can be used to convert black money. With strict vigilance on creation of unaccounted money through other means, people are finding it cheaper and easy to hoard gold in these banks and get loans.
Gold shouldn’t be allowed to become another source of tax evasion. A more robust strategy would be to bring the large stock of gold in the hands of Indian households — estimated at 20,000 tonnes — into the market by encouraging people to convert it into financial products. The government should promote the development and offering of gold-linked financial products, which will give savers the financial returns from gold but not require physical ownership and, consequently, imports. Issuing of inflation-linked bonds by the RBI this month is a right move in this direction though linking it to the wholesale price index does not fully neutralise the impact of inflation. Linking such products to consumer price index may indeed be a better option.
A crucial element of the solution is to increase access and real returns on bank deposits. It implies both bringing down inflation and expanding the reach of banking services. It is also heartening that a RBI-instituted panel is looking into devising some alternative routes. The plan to link the Gold Exchange Traded Fund (ETF) with gold deposit schemes holds promise as it will enable mutual funds to unlock their physical gold held in ETF and invest in gold-deposit schemes of banks.
