Kautilya

India Today, December 21, 1998
Dec 28, 1998

KAUTILYA
Our Great Gold (C)rush

India's yellow fever requires new policy medicine--now.

Jairam Ramesh

India's trade deficit, the difference between imports and exports, during April-October 1998 was $5.8 billion, as compared to $2.7 billion in the same period in 1997. Over $2 billion of the increase in the trade deficit is on account of surging gold imports.

India's appetite for gold remains as voracious as ever. In calendar 1997, the Geneva-based World Gold Council (WGC) reports that India consumed 737 tonnes of gold worth around $7 billion, more than that in the US and China combined. This year demand will probably be well over 825 tonnes. Three-fourths of demand is met through imports, the rest through recycling and scrap. Domestic production is a paltry two tonnes. The amount spent on buying gold in 1997 was a little more than the total amount spent on cars, two-wheelers, refrigerators and television sets combined.

International prices of gold have fallen sharply over the past decade from something like $450 per ounce to around $290 per ounce. This reflects the falling status of gold world-wide. Central banks have been selling their gold stocks. Other hedging mechanisms through specialised derivative markets now offer superior alternatives. But India remains a glittering exception. Gold remains the "safe haven" investment option for all Indian families. Other than land, gold is the only other form of social security that families in this country buy for themselves. Venugopal Reddy, deputy governor, Reserve Bank of India (RBI), estimates 70 per cent of gold jewellery is sold in rural areas and most of the gold sales are by way of jewellery. The WGC itself puts the rural:urban break-up of gold demand at 60:40.

The year 1992 was a watershed for gold in India. The draconian Gold Control Act was scrapped and non-residents were allowed to import 5 kg of gold every six months. The Act had only succeeded in creating a vast underground market. Domestic price premia were 80-100 per cent above international gold prices. This provided a tremendous incentive for smuggling and other illegal transactions in foreign exchange. October 1997 was the next landmark. Eleven authorised agencies, comprising public sector and foreign banks and state canalising organisations, were allowed to import gold freely at about 5 per cent duty and sell it locally.

India's official holdings of gold with the RBI amount to 396 tonnes worth some $3 billion. But the total private holding is placed at close to 10,000 tonnes, valued at about $100 billion. In a country where social insurance is virtually absent for the vast majority (just about 7 per cent of the workforce has provident fund coverage), private holdings of gold should not be dismissed as being "unproductive". They also help sustain a Rs 25,000 crore gold industry that employs around five lakh goldsmiths but that has never received sustained policy support and whose export potential is waiting to be realised.

Exports of gold jewellery in 1997-98 were around $840 million, less than 1.5 per cent of the world market, a share that has doubled in the past six years but which can be increased even further.

Even so, a strong case exists for using our growing gold stocks more innovatively. Four attempts have been made since 1962 to bring out private gold stocks and use them for "development". These attempts have all failed. The most recent scheme was in 1993. It mopped up just 41 tonnes and yielded only Rs 1,540 crore to the exchequer.

We need a fresh look at gold banking and associated tax issues. Turkey, where private stocks are half those in India, has attracted new savings in gold and mobilised gold holdings by converting them into gold-denominated deposits. We could also now experiment with a scheme of gold monetisation managed by the SBI or the UTI.

Investors would have the option to tender gold as well as money. The units would be denominated in grams of gold. The gold principal would remain intact and the capital appreciation on gold would remain with the investor earning a nominal return for him or her. Liquidity has to be provided at all times. The concept of bearer gold units for tapping unaccounted gold could also be introduced.

With exports collapsing, unabated gold imports may tempt the Government to reimpose controls. This would be disastrous. Liberalisation of gold policy carried out by both Manmohan Singh and P. Chidambaram has destroyed one of Dawood Ibrahim's main businesses. The spread between London and Mumbai average prices of gold was around 60 per cent in 1990. It has tumbled to just 6 per cent.

Gold imports have been "officialised". Remittances are now being transferred by overseas Indian workers through official channels. Since 1992-93, private transfers in our bop have spurted by $8 billion. This is largely on account of the liberal gold policy and has helped keep our current account deficit at manageable levels. For the first time India is seeing the strange spectacle of a slight discount on the dollar in the hawala market. The time for consolidation and the next phase of gold policy reforms is now.

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