Despite being the world’s second-largest importer and consumer of gold for many years, with an annual import of 700-900 tonnes valued at $35-40 billion, India is hardly the price setter but only a price taker. Gold prices are determined largely in London and New York markets.
In this context, the Prime Minister’s statement while inaugurating the India International Bullion Exchange last Friday that it was time for the country to become a market maker assumes importance. While large import volume alone cannot give us much clout globally, this grand vision is achievable if we surmount several challenges.
Known as a big gold market, India should now be seen as market maker: PMInaugurates India’s first International Bullion Exchange and NSE-SGX Connect at GIFT City
Predictable Policy: A stable, predictable, long-term policy environment is critical. None exists today. In Indian policymaking circles, gold is seen as a demerit commodity. Policies, tariffs and customs duties keep changing regularly, creating uncertainty among stakeholders.
Transparent Physical Market: The physical market for yellow metal is anything but transparent. Even as the gold jewelry trade is becoming increasingly organised, we still have a sizeable unorganised market. Most importantly, we must comprehensively deal with the grey market to minimise its role, if not eliminate it.
Robust Quality Assurance: This is a key element in the high-value gold jewellry trade. Under-carating is the market’s bane. Strict enforcement of consumer protection law is necessary. Hallmarking infrastructure needs to expand substantially and certification must be affordable.
Solid and soft infrastructure: As important as physical infrastructure like assaying, transport and vaulting is soft infrastructure which covers flow of information, technology infusion and skill development through training of artisans. Because the market is still largely unorganised, data capture and broadcast are more anecdotal. In the absence of scientifically captured data, speculative elements often enjoy ‘information arbitrage’.
Integral part of Global Value Chain: Although a large importer and gold jewellry exporter, India is strictly not an integral part of the global value chain. There are restrictions on trade. Export of gold bar is not permitted while the import is allowed only through nominated agencies notified by the RBI or DGFT.
Currency convertibility: This could be a roadblock to India becoming a price setter in the world gold market. Although remittances out of the country have been more liberal in recent years, there are still restrictions. The Rupee is not convertible on capital account which may be a deterrent.
Strong regulatory oversight: Gold faces multiple regulators, and the oversight is scattered among many institutions, including the Ministry of Finance (fiscal matters), Ministry of Commerce (foreign trade policy), Ministry of Consumer Affairs (quality, RBI (financial institutions) and SEBI (derivatives trade). Often a silo approach marks the regulatory oversight. We need much greater coordination and clarity in policymaking and the implementation of rules.
While these are ‘necessary’ conditions, they may not be ‘sufficient’ conditions to achieve the objective. The issue of perception about the country, ease of doing business, confidence of international financial institutions and investors in the long-term stability and sustainability of business will come into play too.
(The author is a policy commentator and commodities market specialist. Views are personal)