Gold import curbs with single focus of controlling CAD won't work: IGPC

The think tank proposes five-point plan to successfully bring down gold imports, urges clearance of bottlenecks to make GMS viable

The Government plans to curb the import of non-essential items including gold, to control the widening current account deficit. However, a view is emerging that such a single-focus measure will not work. India Gold Policy Centre, which has emerged as an independent body on policy issues related to the precious metal, has proposed an action plan to the government for putting in place a gold policy with five pillars that are aimed at boosting the domestic industry while also curbing non-essential gold imports.

Clearing a few bottlenecks in the Gold Monetisation Scheme (GMS) could easily bring down imports of the precious metal, says the India Gold Policy Centre (IGPC), an independent think tank set up within the Indian Institute of Management, Ahmedabad (IIM-A).

Set up with a grant from the World Gold Council (WGC), the IGPC at IIM-A is a centre of excellence, conducting applied research on the gold industry in India. 

The centre has been tasked with carrying out high-quality research, produce an annual lndia gold policy report, and engage with the government and policy makers on the role of gold in the gems and jewellery industry and within the overall financial architecture, among other things.

The centre, which has been working closely with the government on commodities, believes the latter should not aim at curbing gold imports with the solitary objective of reducing the current account deficit (CAD), It should, instead, take a systemic approach towards the isse. The gold monetisation scheme can be at the core of a solution to the issue of gold imports, according to the centre.

Enumerating at least three bottlenecks that currently hinder successful implementation of GMS, Arvind Sahay, chair, IGPC at IIM-A told Business Standard that the government needs to ensure steps that would incentivise both banks and consumers to participate in the scheme, apart from ensuring presence of globally recognised gold certification.

"IGPC is of the view that instead of reacting to what may seem quasi-temporary events, by taking action that yield sub-optimal results, the government should take a systemic approach. IGPC has been advocating five pillars of this approach including successful implementation of GMS, setting up of a gold spot exchange, globally recognised standardisation or certification, taking steps to help increase gold exports and financialisation of gold as an asset," said Sahay.

For GMS' successful implementation,the government would have to incentivise banks to accept gold as deposits, encourage individual consumers to deposit gold without fear of scrutiny by tax authorities and ensure globally recognised gold certification on such deposits. 

The scheme has largely been unsuccessful, with only 15-20 tonnes having been deposited and brought into circulation, from an estimated 24,000 tonnes of gold held privately. In comparison, even Turkey has been able to bring 3-4 per cent of private gold into circulation. India had inspired to take GMS forward by Turkey’s success. According to RBI data, only 23.5 tonnes worth gold bonds have been sold till June 2018 from launch in November 2015. The response, according to RBI, is low.

Sahay also stated that a spot exchange will not only enable legal flow but will also usher transparent pricing of the metal. At the same time, instead curbing imports to solve the CAD issue, the government should actually look at enhancing exports. 

Quoting the recent Reserve Bank of India (RBI)'s household finance committee report, headed by Tarun Ramadorai, Sahay said, "The report findings essentially tell us that as far as household savings are concerned, in this country 11 per cent of household savings come in the form of gold. So how to create products that could financialise gold and bring it into circulation needs to be seen."

Apart from certification of the metal itself, IGPC has also suggested incorporating a gold sourcing certification that would address the need for responsible sourcing, an issue being championed by the Organisation for Economic Co-operation & Development (OECD). The issue is being raised by OECD in the wake of reports of gold being sourced from mines of nations that are allegedly involved in terror funding. Gold sourcing will also include sourcing of unrefined or dore gold. The issue is significant because without such norms, gold refined by Indian refineries will not be certified for exports. Such sourcing norms also avoid importing from mines in countries that support terrorism or anti-national or anti-social activities.

India's average annual demand for gold has been about 1,000 tonnes the past few years, and has been met primarily through imports as India's only mine produces less than two tonnes of the metal annually. In fact, of the total demand in India, 85 per cent is imported while 15 per cent is recycled gold. Niti Aayog has also proposed as a gold policy that encourages gold mining in India.

Meanwhile, recent measures of the government to reduce CAD by raising custom duty on gold imports to curb the same has not delivered the desired results, with smuggling having risen due to the same.

IGPC has been conducted joint research projects on gold with institutions like XLRI Jamshedpur and University of Western Australia, among others.