The government and policymakers need to create some superior substitute for gold investments to divert the flow of household savings away from the yellow metal and into more productive assets, eminent banker and YES Bank chief Rana Kapoor has said.
One of such products within the banking system could be a deposit account linked to gold returns, Kapoor told PTI in an interview.
"While cultural demand for gold is unlikely to come down for a country like India, the investment demand for gold can definitely be reduced through a multi-pronged approach," said Kapoor during his visit to recently ended World Economic Forum (WEF) Annual Meeting in the Swiss alpine resort town of Davos.
He was commenting on the steps being taken by the government to lower gold imports and to dissuade investors from parking their money into idle assets like gold and move to more productive assets like equity.
Some of the recent steps in this regard include hike in import duty on gold from 4 per cent to 6 per cent, linking gold ETFs with the Gold Deposit Scheme (GDS) to enable mutual funds to unlock their physical gold and relaxation of GDS norms for retail investors by reducing the tenure of deposits to six months from a minimum of three years earlier.
"While the administrative steps are expected to lead to somewhat lower gold imports, it is important to dissuade the incremental buildup of quantum of gold imports," Kapoor said.
"At the micro level, the banking system can effectively intermediate through a gold return linked deposit account, which will represent notional units of gold and provide gold price return in weight terms," he said.
Kapoor said such a product would defer the need for investment in gold to a future date and could potentially lead to a reduction in the gold imports.
"As a second order step, the financial system could then be utilised to partially monetise the existing stock of gold in the country," he said.
Yes Bank chief further said policies should be geared towards maintaining a healthy growth-inflation balance in the country, while providing domestic investors opportunities to invest in alternate asset classes.
"Widening and deepening of the banking and financial markets amid adequate regulatory architecture will effectively create superior substitutes for gold investments," he added.
Asked about the position of Indian economy and markets among the foreign investors, especially after the recent wave of reforms, Kapoor said government policymaking has been significantly revitalised in the last five months, after a lull.
"Key reforms introduced since September 2012 has led to a perceptible revival in investor sentiment," he said, while listing out measures like FDI relaxation for retail, airlines and broadcasting services, as also increase in FII debt limit for government securities and corporate bonds respectively, and deferment of GAAR by two years.
"While these measures would benefit foreign investors, the thrust behind the reforms has been to improve India as an investment destination. The concerns on India's twin deficits have begun to get addressed through the recent bold regulated deregulation of diesel prices and the hike in gold import duties," he added.
"More importantly, structural measures like setting up of the Cabinet Committee on Investments, financial restructuring of state electricity boards, and clearing the draft of the Land Acquisition Bill will create substantive growth multipliers in the medium to long term.
"The upcoming Budget session is once again likely to be crucial as the government is expected to make progress on simplification of the existing tax structure through the much awaited GST and announce concrete measures backing up the fiscal consolidation roadmap provided earlier.
"While curbing the threat of a sovereign rating downgrade, the combined impact of these measures will in my opinion, foster a virtuous trend of higher potential economic growth in the future," he said.
