All that glitters is not gold

In the recent Budget, the Finance Minister made a few announcements intended to put the huge stock of gold available in the country to productive use as well as reduce the adverse impact of gold imports on the current account deficit. These included a gold monetisation scheme, developing a sovereign gold bond, and Indian-made gold coins.

India’s relationship with gold is almost obsessive as it is strongly linked to its religion and culture, and plays an important role in weddings and other functions. It is estimated that the stock of gold in India is over 20,000 tonnes and is held mostly as “under-the-pillow” stock or in temples and by other religious bodies. If the finance minister’s initiatives yield the desired results, they will give a major boost to investments while reducing the current account deficit significantly.

Previous gold monetisation schemes have had very little success. The 1999 Gold Deposit Scheme could not even achieve a conservative target of 50 tonnes. A major reason for the failure has been the inherent distrust in the credibility of the valuation process besides the reluctance on the part of individuals to disclose gold assets for fear of attracting punitive levies.

One of the key determinants of any gold scheme is standardisation and purity verification. The lack of adequate infrastructure for purity verification in an efficient, credible and timely manner was one of the major reasons for the failure of earlier schemes. Assurance of getting appropriate determination of gold content in gold is a sine qua non for the individual to part with stock.

Indeed, the lack of standardisation in a large number of products is one of the impediments to our exports. Given the Prime Minister’s emphasis on ‘Make in India’ and ‘Zero Defect’ policy, it reflects badly on us that our jewellery exports have invariably to be assayed and hallmarked in the overseas destination country prior to clearance for over-the-counter sale.

In India, the Bureau of Indian Standards (BIS) has been tasked with the responsibility of assaying and hallmarking gold jewellery to provide assurance to consumers on the purity of its gold content. The complexity of Indian handmade jewellery, with wide use of solders and varying thickness of gold, challenges the veracity of a random surface sampling for assaying and hallmarking of jewellery as currently being practised in India.

The only way to accurately determine gold content in jewellery is to melt it and then draw a representative sample for testing. Such purity verification infrastructure is almost non-existent in India. The assaying and hallmarking of handmade gold jewellery is at best a misplaced assurance prone to substantial misinterpretation. Further, given the size of the country and the widespread demand for gold in the form of jewellery, even such infrastructure as is available is woefully inadequate.

Because of inherent weakness, limited proactive monitoring and a lax system of enforcement, BIS itself admits that close to 25 per cent of hallmarked jewellery is below caratage. In addition, the process of laboratory accreditation is inefficient, as the National Accreditation Board for Testing and Calibration of Laboratories (NABL) is responsible for accreditation of all types of laboratories, be they pharmaceuticals, chemicals, food stuffs, and so on. It is thus important to have a standalone system of accreditation and, more importantly, proactive monitoring for laboratories dealing with gold or attached to gold refineries.

Clearly then, for any gold monetisation scheme to succeed, the government must put in place a viable and credible architecture of standardisation, purity testing and certification. Presently, the globally respected and accepted certification followed in most countries in the world is what is prescribed by, accredited by and proactively monitored by the London Bullion Market Association (LBMA). The LBMA is an international trade association of 147 members, including refineries, fabricators and bullion banks. Through its maintenance and publication of the Gold Delivery List, it sets the benchmark standards for gold and silver bars throughout the world. The criteria for accreditation are extremely stringent, and from 2004 onward, a regular proactive monitoring of the refiners on the list has been undertaken so as to ensure that the standards are continuously met.

In 2012, LBMA expanded the scope of its requirements by creating the LBMA Responsible Gold Guidance which builds on existing anti-money laundering rules as well as know your customer management systems and independent auditing practices. Consequently there is no need to reinvent the wheel; we need only to integrate ourselves with a globally acceptable and recognised standard for assurance in gold.

Once such appropriate procedures have been set, successful implementation and operationalisation of the Gold Monetisation Scheme would necessarily require (i) a national network of purity verification centres, (ii) world-class refining and fabrication facilities, and (iii) secure storage and distribution facilities. In addition, details of interest to be paid, tenure of the deposit, collateralised lending, and so on will have to be worked out.

It is likely that it will take considerable time to put the architecture in place. At present, only one refiner, the advanced precious metals processing facility MMTC-PAMP, has LBMA accreditation. Once BIS integrates the globally acceptable and sophisticated systems into its set of standards and purity verification, other refiners would have to be given time to upgrade their facilities. However, in view of the finance minister's announcements, a beginning would need to be made with the existing facilities available in the country to unleash the potential of the huge stock of “under-the-pillow” gold available in the country. Time is short and we have a lot of catching up to do.

The writer retired as Secretary, Government of India

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