The Indian economy is the seventh
largest economy in the world by nominal GDP ($2.582 trillion Nominal,
October 2015) and the third largest by PPP ($8.427 trillion PPP, October 2015).
India is running a trade deficit. India
imports more than what it exports. India is the largest consumer of gold in the
world. India accounts for more than 30% of the global gold market. The amount
of production of gold in India is minimal and the need is met by imports. Gold
constitutes 12.50% of the total imports of India. India imports 26.10% of total
world production of gold.
Reason behind the consumption of Gold
The reason behind this large
consumption is that people see it as a safe avenue for investment and it also
brings prestige and status with it.
People also buy gold because of lack of other safe investment avenues
and also lack of education.
Sometimes gold is also used for purpose
of hedging. The foremost reason given for the rising price of gold is inflation
that runs rampant amongst the world’s currencies. While gold is not the cause
of inflation, gold as a commodity responds to market fluctuations and interest
rate changes. Gold is traded in dollar. When there is more inflation and when the
dollar gets stronger gold becomes costlier for people to buy so its demand
decreases and when the dollar gets weaker the demand of gold increases. These
changes in demand cause fluctuation in the price of gold. Gold is also affected
by interest rates offered by banks. If interest rate offered by banks on
savings is low then people will invest in gold therefore the price of gold will
increase and if the interest rates offered by the banks on savings are high
then people will invest more in currencies so the price of gold will decrease.
Problems with Import
of gold in Indian economy
The major problem is that the trade of
gold does not add value to the economy. Gold is brought in India in raw form and then jewellery is
made of it and then people buy it in form of jewellery. Even from the
investment perspective, majority of the Indians still prefer the traditional
way of holding it in the physical form. The statistics says that 75% of this
gold still is used in jewellery. This jewellery is stored in bank lockers and
it is not traded for money so it is not contributing in the economy.
These imports are paid in dollars.
India is running a trade deficit. So more and more import of gold will
aggravate the CAD and will impact country’s FOREX reserves.
The steps taken by the
Government
·
The Reserve Bank of
India has implemented the 80:20 rule for jewellers. That means jewellers have
to use 80 % gold for domestic demand while 20% for value added export.
·
The government also
banned banks from selling gold coins to control the worsening CAD.
·
The government has
also raised import duty to 10%.
·
Under Prime Minister
Narendra Modi, the NDA government has decided to monetise this gold so it can
make a contribution to the economy. For this purpose the government has
launched gold monetisation scheme.
The Gold monetisation
scheme
The government has come up with three
schemes. The schemes are Gold Monetization Scheme, Sovereign Gold Bond Scheme,
and India Gold Coins.
The objectives for these schemes are as
below.
·
To mobilize the gold
held by households and institutions in the country.
·
To provide a fillip to
the gems and jewellery sector in the country by making gold available as raw
material on loan from the banks.
·
To be able to reduce
reliance on import of gold over time to meet the domestic demand.
Here the government is starting the
scheme from a few big cities because the scheme requires a vast infrastructure.
To deposit the gold first of all the purity of gold will be checked by
government authorized centres. When a customer brings in gold to the counter of
specified agency or bank, the purity of gold is determined and exact quantity
of gold is credited in the metal account. Customers may be asked to complete
KYC (know-your-customer) process. The deposited gold will be lent by banks to
jewellers at an interest rate little higher than the interest paid to customer.
To encourage people to use this scheme
the minimum quantity required is kept at 30 grams.
After the purity test the depositor can
have a gold savings account.
One will get interest on the deposited
gold after 30 to 60 days. The rate will be decided by the banks. Suppose the
rate is 1% and you deposit 100 gram gold than after 60 days you will get 101
grams of gold.
The
customer will have the option of redemption either in cash or in gold.
The
tenure of deposit will be minimum of 1 year.
Here
the customers will also get exemption from capital gain tax, wealth tax and
income tax.
The
deposited gold will be held by refiners in their warehouses unless the banks
decide to keep it with themselves.
The
refiners will be paid a fee by the banks to hold this gold.
The benefits to the
banks are as below:
·
To
incentivize banks, it is proposed that they may be permitted to deposit the
mobilized gold as part of their CRR/SLR requirements with RBI. This aspect is
still under examination.
·
Banks
may sell the gold to generate foreign currency.
·
Banks
in India are not allowed to sell gold coins to check the CAD but here in this
scheme we get the gold from public and it is not imported so the banks are
allowed to convert this gold into coins and sale to their customers.
·
Banks
to buy and sell on domestic commodity exchanges, where mobilized gold can be
delivered.
·
This
gold can be lent to jewellers so they don’t have to import gold so it will
reduce our imports.
As this gold will be lent to jewellers,
the imports of gold will be reduced and the CAD will be improved. The banks
will also get interest on this gold loan to jewellers.
Conclusion
India is the world’s largest importer
of gold. The imports of gold worsen the CAD of India. Also this import of gold
does not add value to Indian economy. In response to that, the government
announced the gold monetization scheme on 15 September to mobilize gold held by
households and institutions and facilitate its use for productive purposes and,
in the long run, to reduce India’s reliance on the import of gold. Holdings of
gold in the country are estimated at 20,000 tonnes. Here the customer can open
up their gold savings account. One can store his/her gold for a period and will
get interest on it. The customer will also get tax benefits if he/she invests
in this scheme. This should lead to a reduction into imports of gold improving
the CAD of the country.
References
About the Author
This report has been prepared by Kushal
Shah. He is pursuing MBA from Institute of Management, Nirma University located
in Ahmedabad, India.
Disclaimer
This document is solely for the
personal information of the recipient, and must not be singularly used as the
basis of any investment decision. Nothing in this document should be construed
as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation
of an investment in the securities of the companies referred to in this
document (including the merits and risks involved), and should consult their
own advisors to determine the merits and risks of such an investment.
The information in this document has
been printed on the basis of publicly available information, internal data and
other reliable sources believed to be true, but we do not represent that it is
accurate or complete and it should not be relied on as such, as this document
is for general guidelines only.
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