Gold in India

Jewellery stores in Kerala, Thiruvananthapuram

Background

Those who have been looking at what is happening in India would have noticed that, in the recent past, the Government of India has significantly focused on black money and corruption. A significant contributor to these economic ills was a seriously misguided gold policy. If you recall, we had the Gold Control Act in 1962, with amendments in 1963 and 1968, the net effect of which was to kill the official gold market. Trade moved to smuggled gold and a huge black market for gold developed. This situation continued for close to 30 years.

We saw the beginnings of a transformation when India repealed the Gold Control Act in 1990 and liberalised the import of gold in 1997. Everyone felt that India had finally addressed its fixation on gold, until we walked straight into the global economic slowdown of 2013-14, which led to a massive current account deficit crisis. The Government response included rapid- fire increases in customs duty, a ban on domestic gold loans and the introduction of the infamous 80-20 rule. These restrictions were withdrawn late in 2014, except for the 10% customs duty, which still applies.

In 2015, we saw the beginning of a structured approach to transforming the gold market. In his budget speech in 2015, the Finance Minister announced three policy initiatives: a Gold Monetisation Scheme, a Sovereign Gold Bond and an India gold coin. Though well intended, these initiatives have met with limited success – just 7 tonnes of gold have been mobilised under the Gold Monetisation Scheme, 24 tonnes under the Sovereign Gold Bond and 800 kilos of the India gold coin were minted, of which 100 kilos remain unsold.

The Niti Aayog Committee

Undeterred and recognising the criticality and the untapped potential of the gold market, which provides a stimulus for exports, economic growth and, significantly, employment, in 2017, the Government instituted a Commission on Transforming India’s Gold Market. This task was given to NITI Aayog, the erstwhile Planning Commission, which produced the NITI Aayog Committee Report.

Continuing with a positive approach, the Finance Minister in his budget speech of 2018-19, the most recent financial year, made three significant statements. First, the Government will formulate a Comprehensive Gold Policy to develop gold as an asset class. Second, the Gold Monetisation Scheme will be revamped to enable people to open a hassle-free Gold Deposit Account. Finally, the Government will establish a consumer-friendly and trade-efficient system of regulated gold exchanges in India.

The NITI Aayog Report of 2018, released at the end of February 2018, provides the foundation for realising the policy intent of the Government. Significantly, it has taken the Government 56 years to publish a comprehensive and integrated document on gold; therefore, its implementation cannot be expected overnight.

A positive approach to gold does not necessarily mean pro-gold or pro-gold business policy, because policy considerations for gold in India grapple with multiple perspectives. Traditionally, jewellery provides safety and security for households as well as liquidity under difficult circumstances. It is significantly non-depreciating in its form. It is considered a safe-haven asset whose value will withstand crisis anywhere and, because of the huge demand for gold jewellery, gold is also a significant industry, with employment potential in a country like India, where unemployment is high.

From a macroeconomic point of view, however, since India does not produce gold domestically, the Indian economy will always have to pay for gold through exports or capital inflows, and therein lies the problem. Further, the industry is largely an informal sector and high customs duties encourage tax evasion, so there is a bit of a tightrope balancing act to be performed.

The policymaker’s task was made significantly less onerous when, in July 2017, the Government introduced a unified GST in the country. GST enables monitoring of gold import and domestic transactions, as well as encouraging formalisation of what is a highly informal sector.

Fortunately for the government, MMTC-PAMP has a successful digital platform for gold, which may well be a starting point. The report analyses domestic gold loans to the jewellery sector and recommends the global practice of transacting gold loans in terms of physical gold, including ‘gold metal on loan’ monitoring and its settlement, all of which is eminently achievable once customers are encouraged to open metal accounts linked with existing rupee accounts. A variety of regulatory considerations have been highlighted and commented upon.

There is as yet no debate on according the India gold coin status as legal tender; hence, it will continue as a coin. There is considerable debate in the report regarding the proposed bullion spot exchange, an activity spearheaded by the World Gold Corporation. An industry group is working on this and an interim report is due next month.

The Ministry of Commerce has already initiated a dialogue for setting up a Domestic Council for gold, gems and jewellery. The report highlights setting up a Gold Board comprising various regulatory entities and ministries; however, I believe that will take more time to achieve.

Looking Ahead

While looking at all the positives and the transformation over a 56-year period from the Gold Control Act of 1962 to the NITI Aayog Report of 2018, policymakers will also have to reckon with global economic uncertainty and its impact on India’s economy. A depreciating rupee, a fluctuating oil price and increasing hydrocarbon imports should compel us to temper expectations with reason. Policymakers will surely have to take into accounts these factors. The silver lining as I see it is that we now have a comprehensive 250-page policy document report and knee-jerk reactions may well be a thing of the past.