Fix for India's gold problem?

Fri, 24 Feb Pre-Open

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Since the dawn of civilization, India has been a country obsessed with gold. India accounts for about 32% of the global gold market with half of the gold Indians buy spent on jewelry for the 10 m weddings held each year. This is because most Indians think that gold prices never really go down. It's not really their fault because that's how gold prices have looked like in last few decades. Indians also wear gold with pride because it is associated with something expensive and exclusive.

It is this obsession with gold that is giving the Indian government nightmares. Because of the steady rise of prices of gold, imports have been soaring in the current financial year which has resulted in widening of current account deficit. After petroleum products, gold and silver are the most expensive items on the country's import bill. A widening current account deficit, in turn, has affected the value of the rupee. Higher imports require higher foreign exchange than what is earned to pay imports, which weighs on the value of the rupee against foreign currencies.

In order to discourage gold buying the government had recently announced a change in the import duty on gold to 2% of value from the earlier flat Rs 300 per 10 grams. However a recent McKinsey study, conducted pro bono with the ministry of finance and the Indian Bank's Association has come up with practical solutions to meet the consumer's desire to invest in gold while at the same time mitigate the disadvantages of investing in physical assets. The study has highlighted that besides deepening existing products like mutual funds and gold ETF (Exchange traded funds), the government and financial services firms should capture new savings flows with simple financial products backed by gold. Some of the new products include gold accumulation products and gold bonds which would work similar to a monthly recurring deposit scheme, with customers ultimately obtaining certificates to purchase gold or receive cash. This could lead to annual flows twice the size of the mutual fund industry and, in the next five years, add more than 1.2 trillion for infrastructure and priority sector lending. The study concludes by showing high willingness among middle and upper middle income customers to consider these schemes.