In the Union Budget, finance minister Arun Jaitley observed that India is among the largest consumers of gold in the world, importing nearly 1,000 tonnes every year. According to conservative estimates, stocks of gold in India are estimated to be nearly 25,000 tonnes or equivalent to about Rs 63 lakh crore. This amounts to nearly 56 per cent of the gross domestic product (GDP) or 67 per cent of the total money supply in India. According to other estimates and anecdotal evidence, including talking to markets, the amount of gold stocks in India are at least three times the above mentioned estimates.
The government has proposed in the Union Budget to monetize gold stocks through three schemes. First, to introduce Gold Monetization Scheme (GMS) to replace the existing Gold Deposit and Gold Metal Loan schemes; second, to develop an alternative financial asset, Sovereign Gold Bond (SGB), as a substitute to purchasing metal gold. Finally, to develop and issue an Indian Gold Coin (IGC), with an Ashok Chakra on its face. An IGC would help reduce the demand for coins minted outside India and also help to recycle the gold available within the country. In brief, the government is making efforts to encourage recycling of gold within the country and reducing the pressure on imports that finally impact current account deficit (CAD). The minting of gold coins in India, mainly used for investment, would lead to higher employment and retention of related profits within the country.
Of the three instruments announced, the easiest to implement will be SGBs. These can be made available from banks and especially post offices because of their extensive rural network. Also, to address the need of investors in contrast to consumers, GSBs can wean away an annual demand of nearly 300 tonnes from physical holding of gold in bars and coins and thus reduce pressure on imports. Would GSB need physical gold to be procured and stored as a back-up for the bonds? Not necessarily, as this could be a perpetual annual scheme with buyers and sellers in the market, despite a stipulated maturity period of each series of bonds. There would be need to make these bonds tradable on the stock exchange to make them attractive or redeemable at post offices and banks.
GMS will need infrastructure and time to implement. The gold collected under GMS has to be stored, transported and delivered through a secure and safe supply chain from procurement to last-mile delivery. In India, gold and jewellery business is highly fragmented and unorganised and nearly 96 per cent is family-owned. India, according to different estimates, has about 16,000 gold dealers, 450,000 goldsmiths, and more than 200,000 jewellery outlets, in addition to diamond jewellers. To successfully implement GMS, there would be a need to have a network of gold purity verification centres; world-class fabrication facility; and storage and distribution services.
In the gold business, the most important activity to inspire confidence among market players and consumers is establishing purity through assaying of gold. To help monetization of gold and develop the markets, hallmarking of gold and gold jewellery is necessary. In India, the Bureau of Indian Standards (BIS), headquartered in New Delhi, has been hallmarking gold jewellery since 2000 through its 221 centres in 84 cities but these may be too insufficient for the size of the country.
Further, in view of the highly fragmented market, there is need to assign responsibility to a designated corporation (DC) to channelise gold imports and ensure high quality of gold in the country. Maybe, India could consider establishing its own gold standards.
Initially, GMS should start with gold bullion that implies gold bars and coins. According to current trends, 45 per cent of gold is for investment purposes and therefore is generally hallmarked. The monetization scheme could have two parts—outright purchase of gold or loan against gold deposits. An important aspect would be spreading awareness of the scheme, location of assaying centres, rate at which gold would be purchased or loans provided.
GMS should operate through banks as bank accounts are available for every household under the Pradhan Mantri Jan Dhan Yojana, and help wean away consumers from pawn brokers. If banks have to become active in the gold market, and they should as in other nations, the government and the RBI can consider permitting holding of gold as a financial instrument, as part of reserve requirements in the balance sheet.
An interaction with the market reveals a fear that GMS could be a ploy to unravel black money and therefore the amount of gold offered by the public could be low. To address this problem, the government could consider a provision that gold monetization of 100 grams or less would not require any identification documents. As the scheme operates through banks, any amount of gold more than 100 grams should be monetized through the individual’s bank account.
India needs to use its foreign earnings for importing capital goods which enhance production and growth and not on consumption items like gold. Thus, the new schemes announced by the government are appropriate but the successful operations of these would need extensive research into the behavioral pattern of people in different parts of the country as preference for gold differs between North and South India. These schemes would increase employment opportunities in terms of gold fabricators, assayers, and outlets. India can also become a regional hub in gold refining and recycling. The government could consider reducing high import duty on gold to reduce incentives for smuggling and enhance custom duty collections. Monetizing gold will help in unlocking a high volume of dormant money that would boost the economy by providing purchasing power to the households and much needed liquidity for micro-enterprises.
charansingh@iimb.ernet.in
The writer is RBI chair professor,IIM Bangalore, and former senior economist, IMF