Gold is winning once again

Even the strongest have their moments of fatigue. India's attritional war on gold imports continues unabated. Latest data trend lines show that gold is winning once again. While India's exports grew marginally by 2.73 per cent in September, a surge in gold imports pushed the trade deficit to an 18-month high of $14.2 billion. Overall, imports jumped by about 26 per cent, the highest increase in about last three-and-a-half years, to $43.15 billion in September, 2014. Gold imports in the month under review increased manifold to $3.75 billion compared to $682.5 million in the same month last year, a 450 per cent increase over the same period last year, sending alarm bells ringing in North Block all over again. India's love for gold, backed by festive demand, meant that the government will have to swoop down yet again with curbs to quell this growing demand. The demand for gold is being met mainly by imports (India imported 972 tonnes in 2012-13, reduced to 511.4 tonnes through curbs in 2013-14 and currently it is up to 366.8 tonnes between April-September 2014-15). Gold bullion import is cited as the primary cause for the bloating Current Account Deficit. While the CAD is seemingly under control because of the emergent quantitative based restrictions on import of gold introduced in May 2013, some collateral damage (World Gold Council estimates over 200 tonnes of gold being smuggled into India) has also occurred.

Mobilisation

Tools to regulate gold bullion import flows will continue to be used as needed. With the benefit of hindsight, can quantitative based restrictions be handled differently and be more permanent? Logically, a quarterly determination of import affordability, coupled with its uniform allocation amongst the 25 odd entities permitted to import gold bullion, should enable proactive, dynamic monitoring and management of impact of gold bullion import on the CAD. Much has been written about India's obsession for gold, almost 25,000 tonnes lies as an unproductive asset with Indian households. Valued at $1.5 trillion, which is just a shade below the size of India's GDP of $1.87 trillion. The impetus to mobilise part of the 25,000 tonnes of India's above ground holding of gold becomes integral to the long-term management of the country's appetite for gold. A gold deposit scheme launched in 1999 has achieved less than fifteen tonnes over a 15-year period. It is tailored for banks and large gold holdings, overlooking the gold held by India's teeming millions. Further the only option for banks was to deliver their mobilised gold to the India Government Mint for being refined into gold and the huge time lag resulted in a non-transparent operating environment and inability to assure optimum realisation for their deposit holder. Banks' core competence is currency and credit, not precious metals. It is appropriate that banks focus on what they are good at - mobilising deposits and handling the risks associated with transforming them into loans. Transparency in assurance, storage and tracking and management of metal deposits being important constituents, are best done by an organisation that has the competence to provide the precious metal part of the transaction on behalf of the banks.

Perspective

A recent all India field survey of over 5,121 respondents in 25 cities across 10 states, conducted by the Bureau of Research on Industry and Economic Fundamentals, highlights shortcomings in the existing gold deposit scheme as lack of local infrastructure, high melting, refining and handling costs, a highticket size (a minimum deposit of 500 grams of gold in gross weight), lack of awareness and so on. The field survey established customer perspective of essential ingredients to make a Gold Monetisation Scheme, some of which are:

.. Transparent and quick purity verification of gold content by an internationally accredited refinery in the presence of the customer.

.. Simple procedure for making a deposit and/or redemption of gold... On-line gold holding record (similar to the bank account statements), with Password Protection to assure complete confidentiality.

.. Flexibility on frequency and amount of gold deposited in an individual's account, with Nomination Facility.

.. Create awareness that reaches the correct audience/consumers.

.. Minimum deposit duration should be brought down from 3-5 years to 1-3 years.

.. Minimum deposit interest rates should be hiked to 2-3 per cent, depending on the term of deposit.

.. The successful implementation and operation of an All-India Gold Monetisation Scheme is dependent on a) national network of Purity Verification Centres b) world class refining and fabrication facility c) secure storage and distribution services and d) end-to-end software customised for the operations. The scheme must cater to the requirements of all stakeholders, viz. retail depositors, jewellers /borrowers, banks and RBI. It must support all related business flows and in the ultimate analysis enable efficiency gains. Such a well-coordinated Gold Monetisation Scheme motivates banks - due to inherent advantages of verified collateral based lending by banks - and households that continue to reap gold's unproductive benefit; by providing an easy mechanism to unlock the value of their asset by a reliable and credible institution. This way the asset is valued in a manner that gives high weight to customer service and all this is circumscribed by the ease of monetising gold as simple as operating ones' bank account. This is a historic opportunity to address a long-standing challenge that has persistently been nagging the nation. It remains to be seen how well the policy makers are able to get their act together to unshackle the nation from the compulsions, ease and consequences of gold bullion import, finally relegating gold bullion import as a mere statistic in the nation's CAD.