Economic Highlights

New Delhi, 12 September 2015

                                                            Will A Woman Forego ‘Streedhan’?

                                                            GOLD BONDS GET THUMBS DOWN!

                                                                       By Shivaji Sarkar

Once again the country is mired in gold. Like an average Indian, the Government too is obsessed with the yellow metal. It has happened several times since Independence. Each Government’s stride for introducing a bond has faced practical problems and eventually lost the glitter!

Undeniably, the NDA’s latest move to issue sovereign bonds linked to bullion in an effort to divert some of the demand for gold bars and coins and reduce its imports are yet another effort at taming the shrew. Its scheme? The RBI will issue the bonds with an interest of around one-two per cent to reduce the demand for physical gold.

True, the Central Government has nearly 550 tonnes of gold reserves which would help kick starting the scheme while the public holding of gold is estimated to be over 30,000 tonnes.

Will gold owners bite the bullet? Given that a major obstacle is a family’s emotional attachment with traditional jewellery. Besides, gold is mostly “streedhan”, (legally accepted connotation) a prized possession for a woman. Would any female like to part with her gold for monetizing it in an official rigmarole long-term process?

Arguably, even if a woman decides to pawn her 30 gm necklace to the bank, why would she do that for a mere one per cent interest rate? She also would have to justify the family possession. Then there is no guarantee that she would get back her necklace. In all probability she would get back a small gold bar which she does not fancy.

Importantly, Indians prize gold as gifts and as a way of storing wealth. The country is estimated to consume 900 tonnes or about 33 per cent of the total gold mined in the world. Gold import costs $ 60 billion and is draining foreign exchange reserves. Moreover, the yellow metal is the second-biggest expense on the Government’s import bill after oil.

In May last, the NDA Government proposed that banks treat gold deposits as part of their cash reserve ratio, the share of deposits they are compelled to keep with the Central Bank, or the statutory liquidity ratio, the minimum amount of bonds they must hold.

But after the RBI expressed fears that banks might hoard gold, the Government dropped the conditions. Undoubtedly, the powers-that-be seem to forget that people have never liked or bought the Government schemes since the 1960s.

Recall, 1962 when China invaded the country the then Prime Minister Jawaharlal Nehru to check the foreign exchange drain used the war as an excuse to sell gold bonds hoping that people would turn in their gold as a mark of patriotism.

But after this scheme failed, the then Finance Minister Morarji Desai came out with Gold Control Act 1962 which recalled all gold loans given by banks and banned forward trading in gold. In 1963, making of gold jewellery above 14 carat fineness was banned.

In 1965, a gold bond scheme with tax immunity for unaccounted wealth (black money) was launched. Very few opted for it. Desai finally introduced the Gold Control Act on 24 August 1968. This barred possession of gold bars and coins and all existing gold had to be converted into jewellery and declared to the Government. Licensed dealers were not supposed to keep more than 2 kg of gold and goldsmiths 100 gms.

Desai believed that Indians would respond positively and stop consuming gold to help save foreign exchange. This killed the official gold market but a large unofficial market sprang up dealing in cash only leading to a flourishing black market in gold. Resulting in gold artisans losing their jobs and many families being ruined.

Pertinently, in 1990, India faced major foreign exchange problems and was on the verge of defaulting on its external liabilities. The then Chandra Shekhar Government pledged 40 tonnes gold from the country’s reserves with the Bank of England and saved the day.

Subsequently, India embarked upon the path of economic liberalization. The era of licensing was gradually dissolved. The gold market also benefited because the then Finance Minister Madhu Dandavate abolished the 1962 Gold Control Act on 6 June 1990. Dandavate also liberalized gold imports on payment of a duty of Rs.250 per ten grams.

In fact, the Government thought it more prudent to allow free imports and earn taxes rather than lose it to an unofficial channel. From official imports of practically zero in 1991, India officially imported more than 110 tonnes of gold in 1992, which now stands about 900 tonnes a year.

In September 1999, the first NDA Government led by Vajpayee launched a gold deposit scheme to utilize the idle gold and simultaneously give a return to gold owners thereby help reduce the country's reliance on imports. However, this plan was not widely accepted by the population.

Gold ETFs are also operating from March 2007. These have not become the roaring success it was projected to be.

Besides, it is common knowledge that all gold which is imported is not only for fancy jewellery. The imports serve to channelize undeclared earnings, which the Government now wants to curb through its law on black money.

Many exporters under-invoice their goods whereas importers over invoice. This creates the so-called illegal money which is then routed by importing gold which is disposed off in rupees as gold has insatiable demand. Similarly household gold has easy liquidity and can fetch the prevailing market price at any given time.

So why would one opt for a cumbersome Government scheme? Obviously, the Government has legitimate concerns. But the step taken might look good on paper but does not seem to be practicable.

Further, the fall in gold prices has added glitter to it. This might continue for some time as the US economy and dollar show improvement, says an ICICI Bank study. While a Kotak Mahindra study states that the decrease in China’s gold holdings and Chinese slowdown has added to the yellow metal’s fall. Besides, of late, many international banks have sold their gold reserves.

Additionally, the only scheme which has succeeded is the gold loan scheme. Wherein a person gets an easy loan of up to 75 per cent of the value of the gold as it is pledged with some finance companies.

Clearly, Modi’s NDA Government is in a fix. The monetization is impractical. Raising customs duty or stopping imports would encourage smuggling apart from increasing gold prices. But as the history shows no Government’s intervention has ever helped curb gold imports. The new scheme is fraught with risks. If it succeeds it might belie doomsayers. One hopes it happens like that. ---- INFA