As the debate on monetising household gold stocks rages on to ease pressure on the country’s current account deficit, some are still sceptical about the efficacy of any such plan. However, Rajesh Khosla, managing director at India’s largest refiner, MMTC-PAMP, says any scheme that seeks to put idle stocks to productive use is worth giving a try because if it succeeds in sourcing even 1% of the more than 22,000 tonne of gold lying with households each year, imports would tumble by 20-25%, restoring some trade balance. Referring to his series of interactions with policymakers in recent months, he says the central bank seems to be in favour of such a scheme and the finance ministry has agreed to set up a working group to explore the idea fully, in an interview with FE’s Banikinkar Pattanayak. Excerpts:
What prompts you to believe people will actually invest in any such gold monetisation scheme?
The scheme is aimed at luring people to put their unutilised gold to some productive use. Now, to explore the viability of any such scheme, we commissioned an all-India survey. As many as 60% of respondents say they are ready to park gold if certain conditions are met: the bank must bring down the minimum quantity of gold that can be deposited to, say, 40 gram; it should have a mechanism whereby the purity of gold can be assessed in front of the customer; the customer must earn interest in gold in the form of gold; the interest should be tax-free and finally the customer should have an add-on account for the metal in the bank.
We have had two interactions with the RBI, which seems to be ready to support the scheme. So it’s now the questions of jewellers, banks, RBI coming under the umbrella of the finance ministry and making the scheme a success. What we are asking the ministry is formation of a working group, comprising key stakeholders, including the RBI, and let the group understand the concept and prepare a roadmap. We have been promised by the ministry that a working group would be set up.
How will the scheme work?
A customer who already has a bank account will apply for an add-on account, which will be designated in grams of gold. The banks must be linked to purification-testing centres. All information must be online so that the customer can choose the location of the centre and even a convenient date. On arrival, he will be explained that the gold he would like to deposit will be melted and once it’s done, he can know the exact quantity and purity. The gold will be credited to his metal account. So when you reach a quantity of 50 gram, you will have the option of a fixed deposit, just like the fixed deposit of cash beyond certain levels. Interest on the fixed deposit of gold will depend on the period of investment. Meanwhile, the gold deposited by the customer has come from the verification centre to the refinery and the refiner has converted it into a bar.
What will banks do with the gold deposits?
The banks have to look for people to lend gold to. Every bank has some registered jewellers whom it can approach. Once the scheme is operational, jewellers can apply for gold online and the bank will credit that much to the jeweller’s metal account for a mutually-agreeable period. Once that period is over, the jeweller has to return gold along with interest. So just like the bank collects money through deposits and offers loans to others, the gold loan will function in a similar way.
What will banks do when jewellers don’t want gold, especially in the off-season?
The banks can pledge more gold and less cash with the RBI against their statutory liquidity ratio requirements. This means banks will have more cash in their hands to lend to people at attractive interest rates. But first the banks will give gold to jewellers and if, for some reasons, jewellers don’t want it, they can park it with RBI for the SLR.
Does such a scheme require changes to any of the existing Acts or norms?
No. The country already has a scheme that says the customer has to deposit at least 500 gram, which effectively leaves out 98% of individuals. So the new scheme should take even less than 50 gram of gold to attract millions of Indians, and not just temple trusts or high net-worth individuals. Moreover, the scheme should be made transparent, flexible and hassle-free, just like the fixed deposits in cash. This is going to be a decisive response to the current account deficit problem. Indian households have more than 22,000 tonne of gold and if we manage to grab even 1% of that stock and circulate locally, our gold imports will fall by 20-25% a year.
Which banks are you talking to for adopting this scheme?
At this stage I can’t reveal the names, but we are in advanced stage of discussions with three private-sector banks. They say until the working group is set up, we can settle issues between ourselves. This shows they are quite keen on it.
Recently, a PwC report said India could lose $3 billion in five years due to less import duty on gold dore than on refined gold? As the country’s largest refiner, do you subscribe to the view?
The PwC report is flawed. It says if the entire gold imports of 800 tonne come in the form of dore every year, there will be a revenue loss of $3 billion over five years, assuming there is an almost 2% duty differential between dore and refined gold. Now look at the reality. Total dore production in the world is 3,000 tonne, of which four countries — China, Russia, South Africa and Canada with production of around 900 tonne — mandate that dore has to be refined locally. Now there are 70 refiners in the world who fight for the remaining 2,100 tonne of dore. So to expect that MMTC-PAMP can contract 800 tonne for imports is ridiculous, especially when we are struggling to refine 60-70 tonne a year. Moreover, although the basic customs duty differential is 2% (8% for dore and 10% for refined gold), refining in India also attracts 9% excise duty. So after factoring in everything, including cess and duty credit, the actual duty differential would be just 0.7%.