While the government says the curbs on gold imports helped reduce India?s current account deficit (CAD), senior bullion industry executives argue underlying demand still

persists. In an interview with FE?s Banikinkar Pattanayak and KG Narendranath, World Gold Council managing director (India), Somasundaram PR, says instead of resorting to import restrictions, the government should focus on how to monetise an estimated 22,000 tonnes of gold stocks?highest in the world?lying with Indian households to restore trade balance.

Gold demand volume crashed 39% in the quarter through June from a year before. What are the reasons behind it?

The April-June quarter last year was exceptional for gold. There was no 80-20 rule then; the import duty was 8% compared with 10% now. There was a massive drop of 20% in gold prices on a single day in April. No wonder there was a scramble for gold. Things have changed since. There was no sharp drop in prices overnight in the last quarter. Moreover, high inflation for successive years in times of low growth has obviously bitten into the saving vault, affecting investment not just in gold but in many other asset classes including financial instruments.

There is another theory that gold is not like other commodities and even when prices are high, people could still buy it more?

Demand also picks up when the consumer expects a further rise in prices despite them being already elevated. The consumer always asks himself: Is today a good day to buy gold? He allocates a certain amount of money for gold purchases and tries to buy as much as possible within that limit. So, a window of opportunity to buy exists even when prices are high.

The western definition of investment and jewellery, I presume, does not apply to India in a very strict sense because here while the form is jewellery, the intent is still investment. At the end of the day, jewellery is family wealth in the form of gold which, say, is given to a girl at the time of her marriage. In India, jewellery is also used as collateral while taking a loan.

Many believe gold is an idle investment and doesn?t add to worthwhile economic activity.

How can you disagree with the fact that any investment that a population makes must be available to the economy to drive growth? That?s obviously the whole purpose of savings and investments. Savings must eventually get converted into investments. But the moot question is: Why is it not happening? The answer lies in another question: Which financial investment has given a positive return for the last couple of years? Inflation is biting into fixed deposits and the real interest rate is negative in many products, including equities. Moreover, in equities, the penetration is very low and we know that banking penetration also is quite low in the country.

Moreover, nobody takes a loan to buy gold. They only buy gold and take a loan against it when they want. So, it?s a very important part of the savings mindset. People want to save money in real estate and gold. If that be the case, we must take action to ensure that savings get converted into investments. There is a way to monetise gold stocks with the households by giving them a better way of depositing gold with the banks through which the precious metal can also come into the system. Thus, instead of importing 1,000 tonnes a year, we can attempt to meet 25-30% of gold demand by sourcing from the local stocks. For this, we need to give the households attractive options. What is to be created is an environment, an ecosystem conducive for destocking by households. You can?t just force people to shift the entire savings to equity instruments. There is a Turkey model that we can perhaps emulate.

Please explain this model.

The Turkey model involves gold deposits with banks and allows households having the yellow metal to get some returns on it while still owning it. Upon its deposit, the metal will be melted and the owner is deemed to hold that much of gold in a vault with the prospect of some returns coming in after a certain period of time. So, if a bank collects about 20 kg of gold, it will make a bar out of it and could offer gold as loan to jewellers against a bank guarantee and with a higher interest rate. The bank could, say, make 4-5% because there is always a demand for gold from jewellers. The depositor gets 1.5-2%, while he keeps the gold with bank for a period agreed upon. At the end of the first or second year, for instance, you can take gold back in the form of bar if you want.

So, if 200 tonnes can come in annually this way from around 22,000 tonnes of stocks held by Indian households, it will benefit the consumer, reduce reliance on imports and help create jobs. The people will also be convinced that they can make money from idle gold even while owning it.

Under the extant gold deposit scheme, one has to bring at least 500 gm of gold for depositing it in a bank. This works for temples with large stocks but prevents most individuals from parking gold with banks. In Turkey, an individual can deposit even 1 gm of gold in a bank.

How do India?s gold stocks compare with those in developed countries?

Indian households have piled up the maximum gold stocks, while in developed countries the governments hold the highest volume of stocks. As much as 8,134 tonnes of gold is held by the US Federal Reserve, while RBI holds only 557 tonnes. So, household gold savings in India, just like any other private wealth in the country, is high. You need private wealth to maintain your life because there is no social security scheme here.

When gold prices scaled a peak of $1,900 per ounce in 2011, people were still buying. Now that rates have slumped to around $1,300 an ounce, they aren?t. Why?

Remember, even if gold prices were $1,900 an ounce, people had to have marriages. In those days, the quantum of gold purchases was less but the value was high, because for the same money, you were getting less gold. People who buy gold in India do so with a certain sense of responsibility. They allocate a certain amount of savings into gold. In the last three years, economic growth has tanked. Clearly, people have less savings now. As a result, gold purchases, which were a part of the savings portfolio, have also shrunk.

Do you think global growth actually influences gold prices?

It is a fact that when equity markets perform well, especially in the West, people tend to invest more in equity markets than in gold ETFs. But in the case of India, as the household savings portion was growing when the economy was expanding at 8.5-9% a few years ago, the demand for gold also increased.

Moreover, in India, in a sense, if the equity market does well, gold does well too. If people make money from equity markets here, profits actually go into gold purchases as well. You don?t put the entire returns from equity back into equity, but look at other asset classes like gold and real estate as well. Moreover, the equity market penetration is also low, so not everybody can invest in it while anyone can invest in gold.