Billions on bullion

The sharp surge in gold imports this fiscal once again turns the spotlight on the need to find alternative avenues to meet the insatiable demand of Indians for the yellow metal. With consumers on a buying spree after the second wave of the pandemic, gold imports between April and November 2021 was at a nine-year high of $33.23 billion — around 50 per cent higher than in the corresponding period in 2019-20. The last time gold imports crossed $30 billion in the first eight months of the fiscal year was in 2012-13. The Reserve Bank of India was then forced to take drastic measures to curb imports including hiking import duty sharply and laying down that 20 per cent of gold imported should be exported as jewellery. The RBI’s actions were prompted by current account deficit expanding to 4.8 per cent of GDP and the rupee depreciating sharply. The surging gold imports this year could also turn problematic as the trade deficit has expanded since September, hitting a multi-decade low in November 2021. The rupee is also under pressure due to the rising trade deficit as well as continued foreign portfolio outflows.

High gold imports is a structural issue in India. A recent report by the World Gold Council pointed out that gold imports by India have been consistently high since 2012, averaging 760 tonnes per year. This is because the domestic supply is limited, with imports meeting almost 86 per cent of domestic demand. It is clear that the Centre needs to find long-term sustainable solutions to increase the domestic supply. The obvious way to do so is to bring some of the 25,000 tonnes of gold held by households and temples into circulation. The Centre needs to consider another gold monetisation scheme (GMS) that offers higher returns compared with the previous schemes and is better tuned to the feeling and emotions of consumers. A scheme that promises that another equivalent piece of jewellery will be returned to the customer at the end of the deposit period could find more takers since the biggest drawback of the ongoing GMS is that the customer loses the jewellery and gets a gold coin or bar at the end of the scheme. Building greater awareness towards non-physical forms of gold such as sovereign gold bonds and gold exchange traded funds will also help reduce investment-led demand for physical gold to some extent.

It may also be a good idea to set up bullion banks that focus on gold loans to retail and rural customers. The prime function of these banks will be to mobilise the surplus gold with citizens through gold monetisation schemes. They can also buy and sell gold in the bullion exchanges being set up in India and in the offshore business centre in GIFT City, thus imparting liquidity to these exchanges.