Indians love gold. According to World Gold Council Estimate, Indian households’ own gold worth $1.50 trillion. Gold once purchased or inherited sits in the lockers of households, whose emotional value becomes much higher than economic value. Selling gold is the last thing an individual or household does in financial distress. In economic terms, $1.5 trillion worth of wealth lies idle yielding nothing meaningful to the economy. Being one of the largest markets for gold, India can do much more than being a net importer. The focus mostly has been to discourage accumulation of physical gold and channelising this large source of capital into mainstream economy. 

Government measures

The government has implemented several measures so far to discourage accumulation of physical gold.

It started with increasing import duty by 2 per cent on gold way back in 2009 Budget. Most recently, in 2019 custom duty on gold bar was increased from 10 per cent to 12.5 per cent. Increasing import duty has not yielded much of the result, India’s average gold import over last six years has been around 2,150 tonnes, surprisingly 2020-21 witnessed highest gold imports of 2,542.88 tonnes despite slowdown due to pandemic.

Gold Monetisation Scheme (GMS) was launched in 2015 where one could deposit idle gold with RBI designated banks and earn interest on the same. As per the scheme rules, the jewellery, bullion, gold artefacts deposited will be melted and converted into gold bars or Coins. The depositor at the time of maturity either gets money equivalent or the gold in form of coin or bar and not in the same form as was deposited. This was one of the major reasons the scheme did not find many takers.

Gold Bond Scheme

Government launched Sovereign Gold Bond scheme, refined version of GMS, in November 2015, with two primary objectives: 

a. To reduce the demand for physical gold and to shift domestic savings a part of which is used to purchase gold, into financial savings. 

b. To mobilise idle gold held by institutions and households into productive use. 

Few notable unique features of SGB include earning of 2.5 per cent of return on amount invested over and above the appreciation, zero risk of handling physical gold, capital gains tax exemption on Redemption, and SGB can be used as collateral for loans.

Since launch till July 2021, SGB scheme has resulted in collection of ₹31,290 crore.

While the initiatives taken so far is commendable but not sufficient, government needs to bring in more innovation and measures to channelise the idle gold and make it a productive asset and also to make India play vital role in Bullion trade and price discovery of gold. 

There has been demand from various stakeholders to reduce gold import duty. Gold jewellery and coin manufacturing contribute to employment opportunities across the value chain right gold refiners to a wide retail jewellery network. The smuggling of gold can be controlled once the import duty gets reduced. While the reason to demand is valid, there is also another side to the coin. According to Econometric Analysis published by Gold.org, a one per cent decrease in gold import duty results in a 1.9 per cent increase in consumer demand, resulting in increased imports, which in turn widens the current account deficit.s, the objective of reducing demand for physical gold loses its purpose with decrease in import duty.

The way ahead

Gold industry in India has multiple markets, regulators, different representations which becomes a hurdle in the growth of the overall industry. Financialization of gold is the need of the hour including the priority to develop bullion exchange that can focus on price discovery and provide an entire ecosystem the financial products on gold and the physical deliveries. The major recommendations of NITI Aayog to focus on measures to boost the domestic supply of gold to reduce dependence on gold imports, by streamlining policies on gold mining, refining and monetisation, should be accepted to help transform gold market and Industry in India.

(The author is founder, Dhan and Co-Founder, Raise Financial Services. Views expressed are personal) 

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