Banking on gold

There is an understandably desperate tone to the Reserve Bank of India (RBI) Deputy Governor, Dr K. C. Chakrabarty's recent exhortations to the public against the practice of giving gold as dowry or as religious offering. It springs, perhaps, from the recent tendency of Indians moving away from parking their savings in financial instruments. During 2011-12, bank deposits grew by Rs 701,110 crore, which was less than the Rs 715,140 crore in the previous fiscal, notwithstanding interest rates being raised sharply on both time and savings deposits. Also notable is the fact that nominal incomes in the economy grew and the public propensity to save did not diminish in any significant manner. Moreover, this ‘de-financialisation’ — apparent also from outflows under small savings schemes and the vastly reduced investor interest in equities, debentures or units — has been accompanied by money gushing into gold, real estate and other ‘physical' forms of storing wealth. In the case of gold, there is an added problem: Unlike real estate, which lies within the country, it is substantially imported. Between 2005-06 and 2011-12, India's gold imports have surged nearly six-fold to roughly $60 billion. When people put money into gold, what is savings for them individually is actually a source of capital outflow for the national economy.

But the solution to this cannot come from moral indignation alone. In times of inflation, households are naturally inclined to seek out more ‘solid' ways of preserving the real value of their money. The fact that gold prices have more than doubled in the last three years has only reinforced this confidence. But such returns are usually episodic and shouldn't really deter the public from entrusting their savings with banks at least. A 9 per cent annual interest on term deposits up to five years isn't bad, when it is guaranteed and safe as well. The problem, though, is when the income from these gets taxed at the highest marginal slab, and is also deducted at source — as is inevitably the case. Such issues rarely arise in gold or land, where the investment ‘naturally multiplies' over time and people find way to avoid tax through reinvestments or dealing in cash. And they don't mind even if the returns are back-ended, unlike the yearly interest accruals on bank deposits.

It is time the Government seriously considers tax incentives to arrest the process of ‘de-financialisation’, not the least from a balance of payments perspective. There is no need, for instance, to treat interest on bank deposits as income to be taxed at the normal (often highest) marginal rates. Why cannot it be considered on a par with capital gains attracting lower tax, even if no formal asset transfer may be taking place here? Also, we need schemes incentivising households to deposit their idle gold with banks in return for a regular interest. Such gold can be used as repo collateral to enhance banks' own lendable resources, besides ensuring that ‘savings' in gold are not a one-way import street.