The government is considering a multi-pronged approach to trim gold imports, which includes plans to make the monetisation scheme more attractive.
The government is considering a multi-pronged approach to trim gold imports, which includes plans to make the monetisation scheme more attractive and also easier to adopt to induce households into parking their idle holdings with banks, a senior official told FE.
The interest on gold parked with banks under the scheme could now be raised from up to 2.5% (which varies depending on the tenure). The finance ministry may also raise issuances of sovereign gold bonds and tweak features to shift a portion of investment demand to “paper gold” to trim physical purchases.
These proposals are being looked into as the government is conscious that just hiking the customs duty on gold from the current 10% also raises risks of smuggling.
The plans are part of the broader effort to curb “non-essential imports” and contain their damaging impact on both trade and current account deficits that have exerted pressure on the rupee.
The gold schemes — monetisation, bonds and sovereign coins — haven’t yet generated the desired response, though. The government is aiming at garnering Rs 5,000 crore from these gold schemes in 2018-19, the same as in the last fiscal, but that represents just about 2% of the country’s annual consumption. With renewed push, though, the mop-up can go up but it will still account for only a tiny share of the country’s annual requirement, said some analysts.
While conceding that monetisation plan hasn’t taken off as expected, the official said: “It takes years to set up a completely new eco-system and also bring in behavioural change among people”. “But in the medium term, this is the scheme that can potentially fetch results (to source idle domestic gold and reduce imports) if implemented properly,” he said.
While gold imports were down by 15% up to July this fiscal, a sharp 93% spike in purchases from overseas in August drew policy-makers’ attention. Gold imports have been targeted in the past as well, as some analysts view it as an idle asset that doesn’t contribute much to economic growth, unlike other products. Economic affairs secretary Subhash Chandra Garg said on Wednesday that the government would soon announce the curbs on non-essential imports. While gold, certain electronics and steel prodycts are among the likely candidate to feature on the list of non-essential imports, analysts have cautioned against the limited or no efficiacy of these moves.
World Gold Council (India) managing director Somasundaram PR told FE that any curb on imports could only reverse the efforts at formalisation of the gold economy after the GST came into being last year, apart from encouraging smugglers. Instead, initiatives like monetisation and bullion banks would deliver results in the long run. Malabar Gold & Diamonds chairman Ahammed MP, too, favoured mobilising “idle gold kept in the consumers’ lockers”.
The limited number of collection and purity testing centres, more so in rural areas, and the unwillingness of housewives to get jewelleries having emotional appeal melted so that these can be deposited have dented the appeal of the gold monetisation scheme.
The government was forced to consider move to curb non-essential imports after the widening CAD, apart from global factors, was blamed for the sharp depreciation of the rupee in recent weeks. Analysts have said CAD could worsen to 2.5% of GDP easily in 2018-19, against 1.9% a year before.
Somasundaram said fresh restrictions could also jeopardise attempts to make gold a true asset class so that its benefits to the economy can be harnessed just like any other asset class. Gold demand, as such, is down (7.6% year-on-year in the April-June period to 187.2 tonnes). “So gold isn’t the centre of the problem at all,” he added.
The monetisation scheme offers investors an annual tax-free interest of up to 0.6% for short-term gold investments (up to three years), 2.25% for the medium term (5-7 years) and 2.5% for the long term (12-15 years). The interest is denominated in gold.
The scheme was launched in 2015 to tap the massive gold stocks lying with Indian households, together the world’s largest hoarders of gold, to trim imports and contain their debilitating impact on trade balance and current account. The households hold a record 23,000-24,000 tonnes of the precious metal, worth over $800 billion (based on conservative international prices).