S Gurumurthy

Stock up on gold

S. GURUMURTHY | Updated on March 09, 2018


If curbs on imports are not bringing down demand for the yellow metal, why doesn’t the government think of creating a buffer-stock?

Finance Minister P. Chidambaram, who is battling against the import of gold, recently claimed that gold imports would remain “compressed” during fiscal 2013-14 — almost proclaiming success in containing the import of the heavenly metal. Is the claim valid? Look at the facts.

During January-March 2013, India’s gold imports were down by 5.7 per cent to 215 tonnes, but according to the World Gold Council (WGC), the demand for gold went up by 27 per cent to 256 tonnes in that quarter. India’s gold demand, higher at 310 tonnes in the next quarter, against imports of 328 tonnes, was the highest in 10 years ( Business Line, August 15, 2013)

The Finance Minister raised the import tariff on gold from 2 per cent at the start of 2013 to 8 per cent by June, and 10 per cent by August. The Government also imposed quantitative restrictions. Gold imports instantly declined — from 164 tonnes in May to 31 tonnes in June, to 48 tonnes in July, to 12 tonnes in August, to 11 tonnes in September — even though they rose marginally to 24 tonnes in October. But the demand for gold did not. Despite the fall in imports, the demand for gold, 256 tonnes in January-March, rose to 310 tonnes in April-June 2013 and stayed at 300 tonnes in the third quarter (WGC, October 8, 2013).

The import in the third quarter was just 70 tonnes against the demand of 300 tonnes. Who supplied the shortfall? It needs no seer to answer this question. Gold smugglers who had downed the shutters of their trade in the 1990s have reopened their supply chains — substituting smuggled gold for official imports.

Even as the Government felt comforted by the fall in gold imports in June-July 2013, in mid-August, Marcus Grub, Managing Director, WGC, cautioned that the Government’s actions were only making smuggling of gold into India profitable. Estimating that the gold smuggled into India would reach 200 tonnes in 2013, he added that the government measures would not affect the demand for gold as “in the end it was cultural” and “about saving assets”, “for the wife and family” and was “linked to festivals and weddings”( International Business Times, September 19, 2013).

Marcus Grub seems to understand India better than our own experts. IBT again reported (October 31, 2013) that the smugglers have stepped in to meet the shortfall in official gold supplies. The contraband supplies come from “Dubai, Singapore, and Bangladesh”, Bhaskar Bhat, managing director of the Indian jeweller Titan told Financial Times.

Tip of the iceberg

See the clear symptoms of gold smuggling detected by the enforcement agencies in just three days last week. The Business Standard (November 10, 2013) reported that on November 7, 2013, one person was caught at the new Hyderabad airport with gold bars in his undergarment; the next day, November 8, two women in their twenties with three gold bricks weighing a kilo each strapped to their backs, were arrested at Kozhikode international airport; the third day, November 9, over 58 kg of the precious metal valued at Rs 19 crore were seized from a vehicle bound for Kolkata.

The Kochi Customs Commissioner K. N. Raghavan attributed the accelerated smuggling to the hike in import duty on gold from Rs 22,000 to almost Rs 3 lakh a kg. The gold seizures on these three days in November are just the tip of the iceberg. The claim of fall in gold imports is, therefore, a fiction. The other side of the fiction is the real story — that of the re-emergence of smuggling of gold into India. The lesson is obvious. If import is cut, gold will sneak in stealthily. All that the Government seems to have achieved is to unlicense official imports and license smuggling.

And, whether gold comes through official channels or smuggling, the impact on the external sector is the same. The smuggled gold too has to be ultimately paid for only in dollars to the seller of gold. Even if it is bought for in rupees in India, the rupees are exchanged in the hawala market for dollars to pay the seller of gold, leading to a demand for dollars in the grey market.

When the dollar demand in the hawala market goes up, the dollar values in official markets too rise because like gold is smuggled in, the dollar is smuggled out to meet the demand in the hawala market. When the hawala market yields more rupees per dollar, many who remit dollars into India through banks shift to the grey market. This shift of dollars from the regular to the hawala market brings down dollar supplies in the regular market and causes the dollar value to rise and rupee to fall.

That’s how the Dawood Ibrahims and Haji Mastans operated — exchanging smuggled gold for hawala dollars and rupees for four decades till the early 1990s, with gold smuggling inextricably getting mixed up with crime syndicates. Terming the current gold smuggling as small-time crimes, an official said, “The possibility of bigger syndicates turning to gold smuggling cannot be ruled out, given the margins involved.” Meaning what? While gold was the associate of crime before the 1990s, it could become the companion of terror now.

Indian economic thinkers are copycats of Western economic thinkers and theorists who equate gold with steel, aluminium, copper and the like. And that is the catch — the clash between gold in economic theories and gold in people’s practice. Indian cultural life is intertwined with gold. More than an asset, gold is something sacred.

The Finance Minister says, “If I had one wish which the people of India can fulfil, it is don’t buy gold.” Yet, the Chidambaram couple also own gold — some 104 sovereigns according to their wealth statement to the Election Commission. This shows the clash between economic precepts and cultural practices.

Is the gold habit worse than the tobacco habit which kills 5.2 million a year but still accounted for $720 billion in global sales in 2010 — more than four times the world gold market ($160 billion) and will rise to $890 billion by 2015 — more than seven times the size of the world gold market? Is buying gold worse than consuming alcohol which accounts for $1 trillion in sales — more than six times the gold trade?

If buying gold is a waste, what about buying art, the market size of which is $62 billion, outperforming the equity markets? Market economics is not normative — not centred on what is good and what is not. Again, despite the shift from the socialist financial model to liberalised markets, Indians still don’t prefer stocks (November 12, 2013). Stock is no alternative to gold here like it is in the West.

Policymaking on gold in India calls for a trans-ideological view — actually a paradigm shift. See why. India is the largest consumer of gold in the world — buying a quarter of the world’s gold supplies. Yet not only does it not influence world gold prices, it is actually a helpless victim of gold speculators.

How it works

How can a buyer influence the prices of the commodity he needs? By reducing or delaying the buy he can bring down the prices, and time his purchase so that he can buy cheap. But he can reduce or delay the buy only if he has strategically buffer-stocked the commodity he needs.

Apply this to India as a gold buyer. If the Indian government has adequate buffer-stock of gold, it could strategically offer gold from its stocks to Indian buyers and reduce or sufficiently delay current imports. When a huge gold buyer in the global market delays or reduces buying gold, prices will slide — which is when India should buy.

By the strategic use of the buffer-stocks India can prevent speculative rise in prices in the gold market. But for want of strategic buffer-stocks India is unable to influence world gold prices. More, India’s buying power of gold, instead of being a strategic asset, has become an economic liability.

Indians, masses and classes, hold the world’s largest stock of private gold varyingly estimated at 20,000 to 40,000 tonnes. This over trillion dollar asset serves as family savings and marketable security. And being foreign exchange equivalent, it is also a global asset.

India needs policies that will enable the Government to build a buffer-stock of gold strategically to use its gold buying power. In the past, the Indian government’s gold import control measures have only driven the trade into the hands of smugglers.

As the RBI itself has admitted, such measures are not likely to yield different results in the future. A deeper reflection on gold will convince any sane mind how necessary it is to build a strategic buffer-stock of gold. The issue is how to build it. It calls for a courageous, innovative and positive attitude and policy which will turn gold, now seen as an evil, into a strategic asset of India.

And that is the climax of the discourse on gold.

(The author is a commentator on political and economic affairs, and a corporate advisor)

Published on November 14, 2013

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