X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
RBI Working Group report sets gold standard - Outside View by S.S. TARAPORE
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

RBI Working Group report sets gold standard
Jan 28, 2013

Gold is an emotively surcharged subject. At one end is the common person's attachment to gold and at the other, bureaucrats and politicians pontificating to wean away the common person from gold. The anti-gold lobby claims that large imports of gold are weakening the country's external payments position and suggestions are that gold imports be banned or savage import duties be levied. It is further argued that credit through the organised financial system should be made more difficult.

RBI Report on Gold

In all this frenzy is a path-breaking report on gold by a Reserve Bank of India (RBI) Working Group chaired by K.U.B. Rao. The report provides a framework under which a viable policy on gold can be formulated. For the first time, an official group has presented concrete suggestions for the activation of the huge idle gold hoards in India, which are estimated at 18,000-19,000 tonnes. Kudos to K.U.B. Rao and his team.

Activation of Idle Gold

The Group convincingly argues that if alternative financial instruments are made available to savers with real rates of return and liquidity to match gold, the demand for imported gold would come down. When inflation is high, there is an added incentive to invest in gold. In this context the Group recommends the introduction of products analogous to Inflation Index Bonds.

The Group is of the view that gold-linked financial products could reduce the physical demand for imported gold or at least throw forward the demand for imported gold. The Group recommends Gold Accumulation Plans (catering to small buyers of gold under which gold imports are deferred till the time of actual delivery of gold), Gold Linked Transactions (the transaction takes place outside India without actual import of gold) and Gold Pension Products ( the customer surrenders gold and receives streams of a monthly pension till death). Again, the Group feels that if the already successful Gold Exchange Traded Funds are allowed to lend a part of their gold, the return on these funds would be enhanced; the government has already announced that these funds should place gold with banks. The merit of the Group's Report is that it comes up with viable policy options.

The Group rightly stresses the importance of recycling gold, particularly temple hoards, to convert unproductive gold assets into a financially productive medium. The Group recommends the introduction of Gold Bonds with relatively longer maturities with tax incentives. Since tax incentives are not relevant to rural areas, the Group recommends a range of products to tap rural idle hoards of gold.

Setting Up a Bullion Corporation

The Group recalls that the seminal idea of setting up of a Gold Bank, which was mooted in the Union Budget of February 1992, was unfortunately aborted. The Gold Bank was to mainstream the idle gold hoards within the country. The Group has provided signal service by reviving the idea by its recommendation to set up a Bullion Corporation.

The Bullion Corporation would be a 'backstop facility' to provide refinance to institutions lending against the collateral of gold and also to facilitate pooling of idle gold in the system. The Corporation should be empowered to import, export, trade, lend and borrow gold and deal in gold derivatives. Above all, the Corporation should provide liquidity to holders of gold. The Group rightly stresses that the Bullion Corporation should be nurtured under the RBI umbrella. While the Group suggests that the RBI could prepare a Concept Paper, the Group's Report would be greatly enhanced if the Group were to incorporate a short Concept Paper in its Report. If the idea is approved by the RBI and the government, the intention to set up the Bullion Corporation could be announced in the Union Budget for February 2013, which would help expedite the setting up of the Corporation.

Futility of Restrictions/ Bans and Import Duties

There are intemperate rumblings of resurrecting discarded failed policies of yesteryears. What is distressing is that the RBI and government are considering sledgehammer deterrents to curb gold demand, such as bans or severe restrictions on gold imports by canalising agencies. History would tell the authorities about the futility of such measures as all that it would do is to promote illicit imports of gold. Banning imports of gold would not reduce the balance of payments current account deficit (CAD), which in 2012-13, could be around 4.5 per cent of GDP. Severe controls would result in illicit imports of gold being financed by over-invoicing of exports, under-invoicing of imports and a decline in remittances and as such the CAD will not shrink. Dr. C.Rangarajan has cautioned that while the propensity to buy gold is deep rooted in India, gold imports can come down to more normal levels as inflation comes down. He stresses that efforts to ban imports of gold would be a bad idea. On January 21, 2013, the government raised the import duty on gold from 4 per cent to 6 per cent.

As Dr. Y.V.Reddy has asked, in a milieu in which it is permissible to import a Mercedes-Benz, is it equitable to restrict imports of gold? The tenuous moral argument is that the rich can ruin themselves by luxury consumption, but a paternalistic state must ensure that common persons do not use their meagre resources to buy gold. Fundamental principles of law, liberty and justice would not support such policies.

One hopes that sanity will prevail and that the government and the RBI would address macroeconomic policy issues to tackle the malady of high inflation and not use futile measures of high import duties and bans /restrictions on import of gold.

Response of the Common Person

The common person should not be conned by intellectual pontificating that holding of gold may be good for the individual but bad for the country. So long as macroeconomic policies do not reward savers adequately and do not bring about a significant and enduring reduction in the inflation rate, the common person would be right to continue to invest in gold.

Please Note: This article was first published in The Free Press Journal on January 28, 2013. 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.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "RBI Working Group report sets gold standard". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

The Foundation for Sensex 100,000 is Laid(The 5 Minute Wrapup)

Feb 17, 2018

Top three reasons for Tanushree's presentation at Equitymaster Conference to be centered around a possible 30% correction.

India's Rs 1,66,276 Crore Problem(Vivek Kaul's Diary)

Feb 15, 2018

That's the loss, the government owned public sector enterprises are expected to make this year.

The Big Gamble(The Honest Truth)

Feb 15, 2018

Once you accept the fact that elections are round the corner and that this budget is geared to reach a 40% target, everything makes sense.

How I Beat the Index by 2x... And Why I Believe This Could Happen Again(Smart Contrarian)

Feb 12, 2018

Will Microcap Millionaires be able to replicate its past performance of beating the index by 2x?

NPAs Set to Rise Further with New RBI Rules(Chart Of The Day)

Feb 15, 2018

The RBI overhauls bad loan framework. Banks may come under additional pressure due to rising NPAs and increased provisioning.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS