Indian Psyche on Gold
As part of the liberalization undertaken since 1991-92, imports of gold, were freed; this put an end to illicit imports of gold. For many years the balance of payments current account deficit (CAD) was comfortable and well below 2.5 per cent of GDP. In 2011-12 the CAD rose to US $ 78 billion (4.2 percent of GDP) and further to US $ 88 billion (4.8 per cent of GDP) in 2013-14. Policy honchos went ballistic and targeted gold imports which amounted to US $ 56 billion in 2012-13.The government raised the import duty in phases from 2 per cent to 10 per cent and also undertook savage administrative measures to reduce gold imports. While the CAD for 2013-14 was initially projected at US $ 70 billion (3.7 per cent of GDP), more recent projections are that the CAD in 2013-14 will be only US $ 40 billion ( 2.1 per cent of GDP);some official voices claim that the CAD in 2013-14 will be even lower. While hosannas are being sung for the successful policy on gold, a closer examination shows that the problem of a large CAD has not really been solved. The lower CAD is camouflaged by lower remittances, increased under-invoicing of exports and over-invoicing of imports. Thus, the quality of the CAD is more important than its size.
Resurgence of Illicit Imports of Gold
- Anecdotal information points to a strong resurgence of illicit imports of gold. There has been a large increase in Customs confiscation of smuggled gold and moreover, illicit imports are channeled through smaller airports and sea/ land routes. The lessons of history are there to be absorbed, but the authorities have opted for measures which have failed in the past. There is a demand for gold and if official imports are restricted, there is recourse to illicit imports. The official data on gold imports would no doubt be lower in 2013-14 but more authentic data put out by the World Gold Council, which tracks both official and illicit imports, would show much higher imports.
Unique Features of Gold in India
- India has all along been a large importer of gold. Even at the height of the restrictions (1963-1991) illicit imports were high. India is the largest holder of gold and estimates are that the total Indian stock of gold could be anywhere between 25,000-40,000 tonnes, and these holdings are widely held by all strata of society.
Attempts to Mobilise Domestic Gold
- All attempts to mobilize domestic gold have been handicapped by the authorities unwillingness to offer attractive rates of return and also lack of provision of amnesty for investment in gold instruments. For instance, even now, banks offer only 1.0-1.5 per cent on Gold Deposits for a minimum amount of 500 grammes. At the same time, on US dollar deposits, the authorities are comfortable with paying over 5 per cent per annum.
Need for Fresh Strategies on Mobilising Domestic Gold
- It should be possible to mobilize gold via a Gold Bond issue at an interest rate of say 6-7 per cent per annum. The gold could be passed on to the RBI which could on-lend to banks. Banks in turn could lend to users at a rate of 9-10 per cent. The bond holder could be assured of being able to get back the gold on redemption with reasonable facilities for premature encashment of the bond. It is unfortunate that because of bureaucratic objections we have not experimented with a viable scheme. There is a well known dictum of learning by doing and there is no better way than issuing gold bonds.
- The effective marketing of Gold Bonds would require that finance companies be utilized as they have experience of dealing in gold. It is well known that pawn brokers provide loans against the collateral of gold at a rate of interest of 24 per cent per annum and they also prescribe very large margin requirements.
Gold and Financial Inclusion
- While there is so much emphasis on financial inclusion, it would be worthwhile having schemes of institutional credit against the collateral of gold. The holdings of gold at the grass roots level are significant and it should be possible to draw in large tracts of the population into the financial system. Institutional credit could be provided at an interest rate clearly below the pawn brokers/money lenders rate. Over time, it should be possible to get small holders to hold biscuits/bars rather than jewellry.
Need to Avoid the Moral High Ground
- Under the liberalised regime, imports are permitted for imports of yachts, private planes and a host of other luxury item, under the belief that the rich can ruin themselves if they so wish. But when it comes to gold, the authorities take the moral high ground that the poor should not be allowed to ruin themselves. This is flawed as history has proved that the Common Person has shown great sagacity by investing in gold.
Psyche of the Indian Holders of Gold
- While formulating measures to mobilise gold, the authorities need to appreciate the psyche of the Indian holder of gold who consider gold as an investment and not consumption. Once the authorities understand the holders psyche, mobilization of gold would become a reality as a network could be developed to mobilise domestic gold. Such gold will be competitive vis-a vis imports which would result in a reduction in imports. There is a need to understand the political economy of gold. Removal of restrictions on imports of gold and the lowering of the import duty would win the hearts of the Common Person; in contrast restrictions on gold imports and a high import duty would generate resentment among the masses. The government would rue for not taking immediate measures to ease the restrictions on gold imports. (Syndicated)
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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