The recent budget proposals on gold monetisation/loan and gold-bond schemes will remain dormant like the many earlier attempts to lure Indian households away from the non-productive accumulation of investment in the precious metal. Not because these instruments/proposals are irrational, but for the simple reason that the Indian DNA seeks possession of the metal in its physical form rather than paper gold. The craving for possession of the yellow metal cannot be substituted. Gold, in Indian psyche, is tied to religion, faith, security, tradition and love—all these are irreplaceable. No family wishes to discuss or reveal any information about their yellow hoard for the fear of “nazar” or the “evil-eye”. This mind-set seems immutable even in today’s modern times.
Though the details of the budgetary announcements are yet to be notified, monetisation of family jewellery through a bank is unlikely to be even marginally successful for the fear of disclosures in public domain.
The same would be true for purchase/sale of gold bonds, calibrated to marked-to-market prices with a nominal interest rate of 1-2%. Then, there is an apparent distrust of government from issuing one amendment after the other—be it from RBI, the DGFT or finance ministry. Assuming that official gold import are about 900 metric tons (R2.16 lakh crore, or $35-36 billion) annually, the finance ministry “estimates” that gold bonds worth R20,000-40,000 crore could be sold. This too amounts to a highly presumptuous quantity of 85-170 metric tons. An estimate that varies or deviates by 100% points at a lack of professionalism and understanding of ground realities.
The custom duty of 10% will continue to be sore point in official imports. Imports in grey market will continue to sneak through, depending upon demand intensity and the premium available locally. Tracking gold purchases above R1 lakh ($1,612), through PAN, at the retail level will also not work as traders/jewellers can issue bills of less than R1 lakh as many number of times as required to cover one purchase.
Till 2013, or for about more than two decades, the government allowed unrestricted import of gold through banks and nominated agencies. Thereafter, it experimented with a cocktail of ideas—higher duty, mandated export of jewellery and import of gold in 20:80 ratios, past performance, etc. However, the collateral issues of smuggling, round-tripping of jewellery, etc, have cropped up. When India is the world’s largest market of gold jewellery, insistence on 20% exports was inconsistent with the ground realities.
In this environment of contradictions, ideally, the government should maintain the policy prescription of 2011-12, of a 2% duty through nominated agencies only. The pressure of tackling gold imports to manage the CAD has lessened given the fall in crude oil prices.
Why not leverage bullion imports to promote exports of other items? India’s export is about $320 billion and, at current prices, gold import is about $40 billion. Conceptually, bullion importers, including nominated agencies, should purchase about $40 billion FX from exporters by paying a market-determined premium. This premium earned by the exporter should assist competitiveness abroad, especially, when Indian goods/commodities are facing fierce downside price pressures. Import tariff, too, can be abolished. All exporters are issued 100% bank-realisation certificates (BRC) by the banks—a documentary receipt—for having realised export proceeds against invoiced shipments. All the finance ministry/RBI needs to do is the following.
a) Banks should issue “split” BRCs in two parts—the first one, say, of 10%, and the second, for the remaining 90%, for exports proceeds of any commodity/equipment/services. The first BRC is to be issued in duplicate (one for the bank and the other for customs) and can be named as bullion bank realisation certificate (BBRC). The BRC for the balance 90% can be issued as usual. (Exporters will continue to be eligible for export benefits on 100% BRC.)
b) The Indian exporter should have the “discretion” to trade (sell) the 10 % BBRC to any bullion importer/trader at a market-premium by endorsement.
c) Banks to open import letters of credit for bullion import upon surrender of BBRC. Custom copy of BBRC can be submitted for clearance from airport.
d) All banks may put data of availability of BBRCs with exporters on their website.
e) For consignment imports, remittances can also be done on the basis of BBRC.
The premium on the BBRC will vary virtually on daily basis based upon demand pull in domestic market. This will stimulate higher exports of Indian goods/commodities without any subsidisation. All nominated agencies and select trading houses will be on a par with other importers who acquire BBRCs. The BBRC premium will be billed to consumers.
Will this lead to the elimination of smuggling? The answer is, if the market premium is 6-7%, the possibility of unofficial imports is remote. If the premium on BBRC escalates, grey market operators will be back in business and that would moderate the BBRC premium. The fluctuations in premium will be self-balancing, depending upon market conditions. The government can also decide the percentage of BBRC—10%, 12.5% or 15%, etc—to regulate the premium.
The author is a trade analyst.