India’s ‘gold infatuation’ is well-known, with noteworthy statistics on the quantum of gold consumption. According to the World Gold Council, India holds upwards of 22,000 tonnes of physical gold. In terms of value, this amounts to over 200 per cent of India’s FX reserves and nearly 37 per cent of GDP at prevailing market prices.

Curbing of demand through administrative measures could be challenging as any excessive change in policy could indirectly foster illegal activity in gold.

Demand for gold, a dollarised commodity asset, creates current account vulnerabilities a la the 2013 rupee episode.

New schemes

With this background, the Cabinet plans to monetise gold stocks through three different schemes — Gold Monetisation Scheme (GMS) that will replace the existing Gold Deposit and Gold Metal Loan schemes; Sovereign Gold Bond (SGB) that will act as a financial substitute to physical demand for gold; and Indian Gold Coin (IGC) to reduce import demand for coins minted outside India.

The SGB and the IGC are relatively easier to implement. However, the GMS, which has superior impact potential, will require institutional participation.

The draft proposal will require high-level consultation with all key stakeholders to fine-tune certain aspects. One, the current set of 350 BIS certified hallmarking centres in the country suffer from geographical skewness with 71 per cent of the centres located in western and southern states and no hallmarking centre in six states and UTs (except Puducherry). For the scheme to be successful, government authorised or BIS certified hallmarking centres need to be present in other geographically important centres to make it convenient for depositors.

Two, while full disclosure of gold ownership can be a disincentive for many households, lack of any disclosure can abet the black economy. Hence, the government could keep a suitable slab-based disclosure.

Three, dematerialisation of gold holding with banks would enable them to extend internet and mobile banking platforms along with cheque facility.

Banks can also offer the auto roll-over feature with one-year intervals to help reduce transaction costs. They can also improve customer engagement through marketing techniques such as introducing gold-dispensing ATMs (in the form of IGCs with Ashok Chakra).

Additionally, the RBI gives exemption from reserve requirement to special schemes for export credit refinancing, and NRI deposits. The apex bank could consider giving similar exemption to gold deposits, too. This will reduce costs for banks in the range of 50-100 bps. Initiatives such as offering set-offs/exemptions on VAT/stamp duty/octroi for monetised gold, granting regulatory permission for gold coin sales, trading on commodity exchange and assuring a stable import duty regime on gold can be considered.

Many positives

Further, since the GSA will incrementally enhance the banking system’s ability to lend, it will have an impact on bank credit, money multiplier, and overall money supply in the economy. The interplay between money multiplier and money supply will have to be carefully monitored as it can potentially have some bearing on the monetary policy stance.

The price of gold has considerably softened in the last three years from $1,700-1,800/ oz to around $1,100/ oz levels currently. The current benign price environment offers an excellent opportunity for India to ease restrictions on gold import and implement sound structural policy steps to effectively monetise gold holdings. The consumer will benefit from market expansion as financial substitutes for physical gold would be made available with simplified access.

At a macro level, it will unlock savings in unproductive physical assets and thereby help channelise financial savings towards more productive investments. It will also develop expertise in local hallmarking which would drive demand for ‘Made in India’ gold, both locally and internationally. According to the World Gold Council, a credible hallmarking system could potentially generate 2.5 million jobs by 2020 across the entire gold industry value chain.

The writer is MD & CEO, YES Bank & President, Assocham

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