India needs financial innovation to recover GDP loss from GDP growth

R P Gupta, Author of Turn Around India-2020 explains that it is imperative to enact structural & regulatory reforms thereby, boosting the investment rate and making India globally competitive in delivering long-ranging and sustainable benefits to the economy.

India must quickly push GDP growth to double-digit and recover from the loss of GDP growth over the past two to three years. For this, the investment in productive capital assets and infrastructures (i..e gross fixed capital formation (GFCF)) must increase to 38-40 per cent of GDP. Currently, India’s financial savings rate doesn’t support such a rise in GFCF and hence, the country must attract global funds in a big way. The outflow of forex in gold imports must end. For realising such difficult targets, India needs some “financial innovation”. A new version of the Gold Deposit Scheme, as suggested by the author in his book, could be the right choice. It will arrest rupee depreciation and provide high returns to global investors in terms of US dollars. 

Considering high inflation in the gold price, the existing Gold scheme-2015 is not so viable for the banks and the government. More so, it is framed with limited objectives, which must be expanded. Unpredictable tax and illiquid deposits don’t motivate depositors. A new version of the gold scheme shall resolve all these impediments. 

Currently, Indian public and religious trusts hold more than 25,000 tonnes of gold, which is the highest in the world. Out of which, idle gold and unusable jewellery might exceed 10,000 tonnes, which must be leveraged for multiple benefits to the nation. The key strategy should be that; the deposit of gold may be accepted by RBI as a part of the forex kitty and the “Gold Deposit Certificate” (GDC) may be issued by banks on behalf of RBI. 

GDC from RBI shall provide high security and comfort to gold depositors. The predictable and friendlier tax within the legal framework will ensure the success of the scheme. This is estimated at Rs 1.10 lakh crore  in five years. With proper incentives to depositors, RBI might receive 6,000 tonnes of gold deposit in the next five years, which will eventually boost GDP by 3.5-4.5 per cent along with several other benefits, as estimated and quantified in the book.  

GDC should be tradable & transferable and be converted to a “liquid security paper”. Trading of GDC with the stock exchange must be encouraged. By this, the demand of gold investors, about 250-300 tonnes per year shall be met through “Paper gold” (GDC) and the import shall reduce to that extent within 1-2 years. 

For meeting the balance consumption demand of 600-650 tonnes per annum, RBI may sell a portion of deposited gold through designated agencies. A part of the quantity can be lent to banks for lending it further to jewellers. By this, the entire demand shall be met from deposited gold and import may reduce to almost nil in the next two to three years. Thus, the trade deficit shall reduce by about 2.1 per cent of GDP, which shall directly add to GDP. 

The sale proceeds may be lent to the government at repo rates, repayable in 25 years. This is estimated to be Rs 12.24 lakh crore. By this, the SLR obligation of banks shall reduce and the private bank credits shall expand, pushing GDP. The overall lending rate shall also soften, which would ultimately benefit the entire economy. 

In the balance sheet of RBI, unsold gold stock shall be an “international asset” against the “domestic liabilities”. By this, India will be with a surplus “international asset”, which is not found in the case of several developed nations. Thus, the sovereign rating shall take a leap and the rupee shall strengthen. A strong rupee will boost the inflow of global funds in the debt & equity and support the capital market, which will meet the investment needs of India and increase GDP. With the appropriate deployment of financial resources, the benefits can be multiplied.  

RBI shall redeem GDC to GDC holder “on demand” basis in the shape of physical gold only along with the accrued interest. Simple interest should be applied annually on the value during the deposit. GDC will keep on changing hands and the redemption in the shape of physical gold might be very low. Thus, the unsold stock shall always exceed 50 per cent of the deposited gold. More so, the sizeable interest-free funds shall be available with RBI towards unpaid accrued interest. 

The scheme is designed for the productive usage of idle gold (past physical savings) and the mobilisation of foreign savings (global funds) at a cheaper cost for meeting the investment needs of India. All stakeholders such as depositors, RBI, government, banks, jewellers and the public shall be beneficiaries. 

During the great depression of 1930-33, international financial transactions were severely impacted. In 1944, the Central Bank of the USA was holding the highest stock of gold. It entered into the famous “Bretton Wood” agreement with 44 nations and convinced them to transact in US Dollars. It was the beginning of the dominance of the US dollar and the prosperity of the US economy. If so, why not India leverages its private gold stock, stabilise the rupee, make it fully convertible and finally convert the rupee into “Reserve Currency”? 

At this juncture, this scheme could be indeed a game-changer. However, it is imperative to enact structural & regulatory reforms thereby, boosting the investment rate and making India globally competitive in delivering long-ranging and sustainable benefits to the economy. 

R P Gupta, Author, Turn Around India-2020