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All that is wrong with our gold policy

S. MURLIDHARAN
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Incentivising gold deposits rather than loans would increase the supply of the yellow metal.
Incentivising gold deposits rather than loans would increase the supply of the yellow metal.

Given the stubborn current account deficit in our balance payments position, the need of the hour is to be frugal with imports. Oil imports, which lead the import list, are unavoidable, but the import of the second largest item in the basket — gold — is indeed amenable to a steep reduction, if not elimination. The ongoing financial year will go down in our fiscal history as the one in which a record quantity of gold, nearly 1,000 tonnes, was imported.

This, when the stock of gold strewn across households and bank lockers, estimated at 15,000-20,000 tonnes and valued at around $750 billion, is good enough to build the much-needed social and physical infrastructure. Gold is one asset that ironically is both non-income producing and idle, while constantly being on the upswing, thanks to its scarcity value stemming from lack of fresh discoveries of substantial gold anywhere in the world.

No less ironical is the fact that while we routinely agonise over the wealth stashed away abroad, we do not bother to look at what there is right under our nose. This is not to say that the government should take over all the gold in the country in whatever form by issuing a diktat, assuming that were workable. But what is within its power is incentivising gold deposits, while simultaneously rendering gold loans unattractive.

Gold loans

Right now, the reverse is happening. Gold loans are virtually on tap, which is why they are such a rage, causing a further increase in the money in circulation that needs to be curbed. Making gold loans as difficult as possible would force owners to encash their holdings in the market. The result would be a greater quantity of gold coming into the market for circulation, which would put the brakes on imports, and on relentlessly soaring domestic prices.

And in a parallel move, the Government should take a fresh look at the Gold Deposit Scheme, 1999, operated by the State Bank of India without much fanfare or success, and remove the irritants. Its main feature is — gold, in whatever form it is brought, jewellery or gold coins or bars, would be melted, assayed and minted at the India Government Mint. Fair enough, given that unless the entire gold collected is homogenised and made fungible, the bank cannot introduce it in the market. An average Indian woman is sentimental but she might not be averse to melting her collection of jewels, given the right incentives.

Reparation charges

While she knows that she will get back the gold or the current market price thereof at the time of maturity of her deposit, what is galling for her is the mutilation her jewellery has suffered at the hands of the bank. In all fairness, she must be paid something to enable her to convert the malleable yellow metal she gets on maturity into what she likes.

In addition to the interest, which is pretty low at 0.75 per cent per annum for three years and 1 per cent per annum for four/five years, even if calculated in gold terms and not in rupee terms, she must be given reparation charges on maturity, maybe 3 per cent of the current value of gold.

Contrary to the popular belief that fear of the taxman is responsible for the lukewarm response to the scheme — just about 4,000 kg garnered thus far in its more than a decade of operation — the factors that dissuade the gold owners are fairly simple and addressable.

The minimum quantum of deposit of 500 gm makes the scheme suitable only for a minuscule segment of the population. It should be restored to 50 gm, though that, by itself, would not be a strong pull factor. Proper recompense must be paid.

The present system of calculation of interest in terms of gold — 500 gm of deposit for four years now earns 5 gm every year as interest which is converted then into rupee terms in accordance with the current market price of gold — should continue, subject to the caveat that any fall in the price of the yellow metal beyond the specified threshold would not be considered for calculation of interest. In addition, she should also be paid reparation for the mutilation her possession has suffered.

Increasing supply

The bank is accepting gold deposits and turning the gold into a fungible commodity with a view to making profits during the deposit term. It should, therefore, have no hesitation in giving a deal that is fair to both parties.

The fall-out of wielding the stick, rendering gold loan unattractive, would be more gold entering the market by way of sale. So would the dangling of the carrot of gold deposits in the form of greater recycling of existing gold.

Operated in tandem, both would have the salutary effect of increasing the supply of, and recycling, domestic gold.

In its wake, the brakes would have been successfully applied on mindless import of gold.

(The author is a Delhi-based chartered accountant. blfeedback@thehindu.co.in)

(This article was published on January 4, 2012)
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Comments:

It is a good idea.
My opinion on repartiation incentive is that,in present market condition any gold article we buy will cost us 10 to 25% of the actual weight as making and KDM charges. Considering this many people may not be interrested to deposit gold in ornament form.
If my understanding is correct, what ever form we deposit gold, we will get back as bars on maturity.
Policy makers should look into this point also.

from:  Sai
Posted on: Jan 5, 2012 at 08:56 IST

Absolutely idiotic article written by appeaser of congress who dont
want to talk about black money abroad but want to to blame people
holding gold. when the govt is busy in printing currency and devaluing
ruppee the only safe haven for retail investor is gold to which they
stick but seems that this stoogee of congress want to rip people off
with till their last bone. But thankfully the people of India who have
been going through countless bloody (islamic) invasion since 7th
century know the importance of gold much more than this writer do.

Utterly shameful and disgraceful article written in such high profile
news paper. I dont know why most of the English speaking news medium
have turned anti hindu and anti India. For they always support anti
hindu line taken by congress and its stooges.

from:  Vivek
Posted on: Jan 5, 2012 at 11:08 IST

Absolutely senseless article. Tell me one other mode of investment that I can pass on to next generation with no depreciation in purchasing power.


from:  premsagar
Posted on: Jan 5, 2012 at 18:12 IST

Ipso facto, the whole gold policy needs a re-look in view of spooking Rupee, Balance of Trade and dwindling exports. Hitherto most of the black money is invested in 1) Gold 2)real-estate and 3)ostentations and finally finding way to invest oversea. State Bank policy is a total farce and so a failure. It would once again be foolish to repeat 'voluntary disclosure scheme'. Country must resort to hard measures like restrain Gold import, Defense Hardware, flashy cars and other luxury items through fiscal measures till the conditions improve.

from:  AP.Upadhyay
Posted on: Jan 7, 2012 at 20:45 IST
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