Getting Gold To Glitter More

   J MOSES HARDING 
The resolution to one of the critical structural woes of the Indian economy revolves around gold. In India, there is not enough domestic capital to fund capacity expansion, while domestic capital is exported on a permanent basis to fund gold imports even after adjustment of related value-added exports. Investment in economic and financial assets is good for the system to expand productivity and employment creation, while investment in non-financial gold asset is idle and unproductive to the system, considering that it is locked up at home or in safe deposit lockers without being put to productive use. The value of idle household gold is huge, maybe more than USD 1 trillion. It requires to be unearthed. 

The agenda of the Gold Monetisation Scheme is to take out the idle gold with the intent to reduce dependence on imported gold, thus serving the two-point agenda of generating domestic capital for economic productivity expansion and avoid import of gold, which is categorised under non-essential imports. The recent significant improvement in India’s macro-economic fundamentals are due to a decline in current account deficit from 5-7 per cent to 1-2 per cent of the GDP and the resultant dilution of pressure on the rupee exchange rate and inflation. The improvement is not really by design, but from external factors of sharp decline in commodity prices, including precious metals. 

It is now critical to make CAD sustainable at 1-2 per cent by design through reduction in import of non-essential items through domestic production. If India can unearth the idle gold in the system through payment of interest to the depositor and use the gold deposits to avoid imports, it would not only cut dependence on imported gold but also puts cash into the hands of depositors for expansion of consumption and demand for goods and services. The strategy and intent is good; the key is the efficiency of execution!

The Scheme: A Critical Analysis
The Gold Monetisation Scheme (GMS), 2015 is a modified version of the existing Gold Deposit Scheme and Gold Metal Loan Scheme. Needless to say, these schemes have not provided the desired results; hence the need for improvisation to meet the set objectives. The scheme allows scheduled commercial banks to offer a Gold Deposit Account, denominated in grams of gold, to retail and institutional customers for a period of 1-3 years as ‘short-term bank deposits’ and in the account of the central government for 5-7 years and 12-15 years as ‘medium and long-term government deposits’. The accumulated gold will be sent to collection and purity testing centres, notified by the central government and certified by the Bureau of Indian Standards (BIS). 

Post the test of purity and confirmation by the depositor, gold would be sent to refiners accredited by the National Accreditation Board for Testing and Calibration Laboratories (NABL) for conversion into bars as an alternative to imported raw material required for jewellery units and other consumers of gold bars. The success of the scheme is obviously dependent on the demand for the product from gold depositors and demand for indigenous bars from importers, who should see it as a better alternative to imported gold.
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Will the scheme attract depositors? The majority of the gold in the system is in the form of jewellery with household; some are in the form of coins and bars as investment to hedge against inflation and price appreciation; and some are converted to gold as a substitute for currency due to convenience of safe-keeping. The success of the scheme is dependent on the willingness of the households to convert their jewellery into trade-worthy gold bars, which already have the option to raise liquidity through gold loans to meet short-term cash requirements. The interest earned while it is idle is not seen as an efficient alternative to this category of the targeted segment. 

On redemption, the depositor has the option to redeem in rupees at market value or in gold. In the current trend of decline in gold prices, selling now for a higher rate of interest may be seen as a better option by savvy investors. For others, the cost of conversion of gold bars to jewellery may prove more expensive than the interest earned. The premature redemption risk for the depositor is high as the option of realising in gold or rupees is at the discretion of the bank. Irrespective of these hard facts, gold biscuits and bars idling in safe deposit lockers by the investor community are good enough to make this scheme successful in the initial stage. 

Will it be a better raw material as an alternative to imported gold? Business entities who import gold as raw material will have the option to choose between imported and indigenous gold. The product has to be competitive in terms of quality and value. While imported hold is hallmarked against international standards, will the BIS-certified domestic gold bars be acceptable? Therefore, it is critical to establish comfort with gold importers about the fact that indigenous gold is guaranteed for purity and is at par with imported gold from established foreign refineries. 

This risk is mitigated through the option of selling to the government-owned MMTC for minting Indian gold coins to buy time till jewellers get the appetite to buy outright or borrow through the Gold Metal Loan Scheme. The immediate benefit will be from reduction in import of gold by the MMTC by absorbing the entire mobilisation under the GMS. 

What is in it for the intermediaries? It is a high-risk product for bank intermediaries for efficient management of the underlying price risk against wafer-thin intermediation margin after adjusting for the CRR and SLR cost, net of idle gold asset held on the balance-sheet. The existing nominated banks for gold imports will see this as an opportunity for product diversification for higher productivity and efficiency of the business unit.

Benefit for Stakeholders 
The economic benefit will be from productivity expansion of the existing refining units and other entities engaged in the end-to-end mechanism, thus leading to employment generation, wealth creation and contribution to GDP expansion. The sustainability of India’s growth agenda is highly dependent on the efficient management of current account deficit, rupee exchange rate, and inflation to enable the RBI to stay in a growth-supportive monetary policy stance. The government is committed to turn the current account neutral through various measures. Some are around building exports through the ‘Make in India’ agenda, cutting import of non-essential imports, and indigenous production of essential imports. 

The conversion of non-financial assets into productive investment will help India to stay less dependent on external capital for capacity expansion. This will lead not only to self-sufficiency but will also ring-fence the Indian economy and its financial markets from external headwinds and economic and financial shocks. The execution ability of the government will be critical to make the scheme a success as most stakeholders are public sector entities who should walk the extra mile to provide comfort to depositors in the initial stage and make it a good alternative to users of imported gold. A similar scheme launched in 1999 did not meet the desired objective, and it is important to make the improvised 2015 scheme an economic success story for India.