By Prashanta Chandra Panda in Ahmadabad, September 18, 2016

Gold has been hogging headlines in mainstream media in India. Not that we got some chemical solutions to create gold. If that happens, it will certainly be worst nightmare for world financiers for consumers and industrial users.

Yes…. gold is finding its substitute which rides on his prices. It is a paper instrument. It is likely to be a store of wealth for many users and one such portfolio decisions for others. The Government of India has launched its fifth tranche of sovereign gold bond scheme. Gold is about to prove once again they are non-allergic.

The question is why gold remains as hot as summer in India. Apart from its role as wealth in store, use in chemical and electronic goods, jewelry and as collateral or a constant reminder to the external value of rupee it has become dear to the government. It is a tradition in India to accumulate gold as part of wealth. Traditional portfolio investment practices even in a middle class family had been fixed deposits followed by gold or insurance, land and equity.

Indians love to display gold jewels to their near ones in family gatherings. Most interesting part of gold transaction is overlying dependence on some locally trusted bania/ gold smiths regarding the quality of the products. Women are the major decision makers behind the buying decisions irrespective of their earning status or knowledge about the purity of the products. We find of the total consumption of gold 78% is for jewelry. This is serving as most primary and valuable use of metals in various cultures.

One also invests in gold coins, gold bars and gold bullion. Mostly blindly put faith as hedge for inflation. Inheritances are other such purpose. This avoids unnecessary glances from the government and neighbours and is taken as to be the best collateral. Temples like Padmanabhaswamy Temple, Kerala, Sri Venkateswara Temple, Tirumala, Andhra, Vaishno Devi Temple, Siddhivinayak Temple, Mumbai, Saibaba Temple, Shirdi, Maharashtra together hold tones of gold. Conservative estimates put it around 4000 tonnes. India alone consumes around 33% of the total gold mined in the world.

Apart from religious purposes across all religions in India, gold has industrial uses. Gold makes for the best fillings, found in orthodontic appliances. You have gold isotopes and gold salts. One finds few milligrams in a single mobile device, connectors, chips, laptops all have small use of gold. Space vehicles use gold coated polyester film to reflect infrared radiation.

So much of Gold, Yet Bad News

India is not a gold producing economy. We are the second largest gold consumer in the world. We have one of the largest consumers of gold in the world and import as much as 800-1,000 tonnes of gold each year. India’s gold reserves are close to 557 tonnes during 2013-16. Official gold reserves of US, Germany, Italy, France and China are 8133.46, 3380.49, 2451.84, 2435.66 and 1823.3 tonnes.

A country’s efficiency in production, external dependency is reflected by its current account. Trade balance shows the value of goods exports minus the value of goods imports. India has been recording sustained trade deficits since 1980 mainly due to the high growth of imports, particularly of crude oil, gold and silver. Current account deficits had peaked to 6.7 per cent of GDP in the third quarter of 2012-13. In July, 2013 government increased custom duty to 8%, and excise duty on raw gold bars to 7%, and disallowed import of gold in credit to discourage gold consumption.

Petroleum and crude products and gold are two major items straining India’s foreign exchange reserves. They put pressure on our currency; weaken its outlook as the deficits grow wider in current account. Market for re-export of gold in terms of jewelry has been stagnant for a time period though significantly near 15% of total exports. Rather we see instances where traders take advantage of export promoting incentives under jewelry section. Domestic trader pressurized government to increase the limit for expenditure for customer identification, raising excise duty exemption limit for small scale industry to Rs 10 crore from Rs 6 crore, waived the levy on sale of traded goods and relaxed various procedural norms.

India’s Trade Imbalances

We have deficit trade balances for many years. If you see a ten years picture this has climbed from a deficit of $43.25 billion to $144 billion between years 2005 to 2015. Oil prices have reduced by 50% from the peak these years and elasticity of demand for has climbed to -1.20. On an average we are importing 800 tonnes of gold annually. Foreign exchange reserves equivalent to almost 35 billion US $ we are losing on gold 2015. Together India’s exports of cotton (7.7bn US $), articles of apparels and clothing accessories (7.6bn US $) , iron and steel (8.7 bn US $) and articles of iron and steel (7.6 bn US $) cannot match its bill. Gold consumes 11 % of our import bills in recent years which could have been used for more capital imports to bring efficiency and promote productivity. Gold re-exports in ornaments fetch us good revenue too. But this market is stagnant.

Looking at the recent data we find gold imports is nearly 34,981.52 million $ for the year 2015. This may be more than 30% less in value comparing 2011 and 2012. This is also contributed by the curbs we imposed and fall in the international price of gold.

Era of Gold Monetization Scheme 

This is otherwise known as ‘Revamped Gold Deposit Scheme’ and the ‘Revamped Gold Metal Loan’ scheme, linked together. Scheme aims to put gold into productive use. Through schemes households and institutions in the country will put gold to the government. The government aims to create or provide designated testing centres to certify purity of gold to handle fine gold and 23, 22,21, 20, 19, 17, 14, 9 carats of relevant Indian standard of  gold.

The long-term objective which is sought through this arrangement is to reduce the country’s reliance on the import of gold to meet the domestic demand. The revamped GDS will provide the depositors of gold, improved infrastructure (in terms of ease of depositing, faster processing’ transparency) and greater flexibility in the terms and tenure of deposits.

A customer can bring in any form (bullion or jewellery) of minimum 30 grams of gold. Fitted with CCTV customers is allowed to see the readings of the weighing balance and the XRF machine. Customers nod is needed to melt the jewelry or keep it in the same form. Cost of this exercise is borne by the customer. This may take 4 to 5 hrs. A Gold Savings Account can be opened by customers at any time, with the KYC norms, as applicable, even prior to depositing gold at the Collection and Purity Testing Centres. Customer is issued with a certificate certifying the weight and purity of the gold by the collection centre.

Producing this certificate, bank  will credit the ‘equivalent quantity of Standard gold of 995 fineness’ of gold into the customer’s account. The refiners will keep the gold in their ware-houses, unless the banks prefer to hold it themselves. Here consumer is not charged. BIS is developing protocols so that it can conduct accreditation of the products being produced in these refineries also.

For the services provided by the refiners, they will be paid a fee by the banks, as decided by them, mutually. The banks will enter into a tripartite Legal Agreement with refiners and Collection and Purity Testing Centres, that are selected by them to be their partners in the scheme. The Agreement will clearly lay down the details regarding payment of fee, services to be provided, standards of service and the details of the arrangements between the banks, refiners and collection and Collection and Puritv Testing Centres.

Tenure, Interest rate and Payment :  

There will be lock in period to reduce unnecessary volatility. Short term can be 1 to 3 years. Here banks can decide the rate of interest. Early redemption can have penalty. Government is also designing medium term (5-7 years) and long term category (10-12 years) too. Banks need to assess the prevailing international lease rates, other costs, market conditions etc. to decide the rate and can denominate interest in grams of gold. The government, in consultation with the RBI from time-to-time can decide the rate of interest (and fees to be paid to the banks for their services) for the medium and long-term deposits. The interest rate for the medium and long-term deposits will be denominated and payable in rupees, based on the value of gold deposited. Redemption of fractional quantity (for which a standard gold bar/coin is not available) would be paid in cash.

Utilization of deposited gold:

Under short-term Deposit: (a) Coins; Banks may provide the mobilized gold to MMTC for minting the Indian Gold Coins. (b) Lending to jewellers; Banks may lend to jewellers under the GML.

Under medium and long-term deposit:

1. The gold deposited may be auctioned by RBI or MMTC or any other authorized agency by the Govt, at the earliest and amount realized will be used by GoI in lieu of government borrowing.
2. The deposited gold may be credited to RBI’s reserves
3. Coins” Banks may provide the mobilized gold to MMTC for minting the Indian Gold coins
4. Lending to Jewellers – Banks may lend to jewellers under the GML.

Tax Exemption: 

 Tax exemptions are same as those available under GDS. The depositors may be informed by the banks that as per CBDT instructions No. 1916 dated 11th May, 1994 (Attachment-c), in course of IT Search u/s 132, gold jewellery to the extent of 500 gms per married lady, 250 gms per unmarried lady and 100 gms per male member of the family, need not be seized by tax authorities, but the tax penalties, as applicable will be levied.

Gold Reserve Fund:

This Fund is important to absorb the price risk of the gold. Fund is also kept for pay back the amounts due to the depositor prevalent at the time of redemption. The modalities for payment from ‘Gold Reserve Fund’ are to be framed by RBI. The most interesting part is that this gold will not be hedged for the risks by the Govt. of India. The difference between the current borrowing cost for the Government and the interest rate paid by the Government under the medium/long term deposit will be credited to the Gold Reserve Fund. To make it sustainable government Gold Metal Loan Account is created a tripartite agreement between bankers, refiners and jewelers.  This is denominated in grams of gold only short term deposit option.  Banks earn from this as well as can treat gold mobilized as a part of their SLR. This makes more ready made fund available for the purpose and more secured capital for bank that could facilitate in determining  interest rate. If it succeeds, one may see strong correlation of interest rates between two markets i.e. government bond market and gold schemes.

(The author is Faculty of Economics, School of Liberal Studies, Pandit Deendayal Petroleum University, Gandhinagar, Gujarat)