Given how gold imports have risen dramatically, from 10.7% of the total import bill in Q2FY12 to 13.3% in Q1FY14, it’s not surprising the finance ministry is so single-mindedly focused on curbing gold imports. This has taken the form of increased cash margins for LCs to restricting imports and dramatically hiking gold import duties, from a flat rate of R300 per 10 grams to 2% from January 17, 2012, 4% in the FY13 Budget, 6% in January 2013, 8% in June and 10% in August. While gold imports fell to $2.9 billion in July, or 7.6% of that month’s imports, it is too early to say how the rest of the quarter will go. But given gold demand usually picks up in Q3, what’s not clear is why the government has not made aggressive moves on the suggestions, by the RBI’s KUB Rao committee among others, to control gold. While increasing sales of inflation-indexed bonds was one of them given that gold is being bought as a hedge against inflation, the most significant suggestion related to dematting of gold. While the product, at a basic level, is much like a gold ETF—whose demand has gone up from a mere R865 crore in July 2009 to R10,669 crore in July 2013—there is a vital difference.
Since most of those buying gold in the current scenario are buying it as a store of value, the scheme envisages an Indian consumer going to a bank and buying a gold bond worth, say, R1 crore—based on today’s value of gold, the bond will have a certain denomination of gold. The bank now buys gold futures on a global exchange and uses part of the R1 crore as margin money. Six months later, if the gold price goes up and the customer wants to cash out, based on the prevailing price of gold, the bank gets the difference in dollars from the global futures exchange and uses that to pay the customer in rupees—the only forex outgo on the transaction is the payment for margin money on the bank’s purchase of gold futures. In case, however, the customer wants physical delivery of gold 6 months later, the bank will extinguish the futures contract, buy the gold and ship it to India—obviously, the lower the number of customers who want their gold in physical form, the lower the forex outgo for the country. Since around 40% of