By Arvind Sahay
Although gold’s contribution to the current account deficit has reduced since 2012, the net dollar outflow has more to do with the design of the trade than the affinity of people towards gold. Some large consuming countries (like Turkey), when faced with a similar issue, redesigned gold trading in their countries, making it integral to economic growth. The result is, these countries have active mining, refining and bullion banking, and gold trading is now transparent, with material contribution to GDP.
Streamlining supply and demand requires an ecosystem that carries incentive for all the stakeholders, including consumers, that encourages one to operate within the official network. This ideal scenario can get quickly shot down with a 15.5% tax (customs duty plus GST) arbitrage that exists. We need a holistic approach to gold with regulatory change, infrastructural development and phased implementation. The timing to bring this transition can’t get better than now.
Indian households combined hold more than a trillion dollars of gold, and it’s possible another trillion would get accumulated in the next 25 years. Failing to streamline flow and consumption through an organised trade or taking a more straightforward path by imposing curbs on consumption, both can have a detrimental effect on the economy.
A holistic approach: Let us fast forward to an era following appropriate reforms in the Indian gold market—the consumer shall be active in gold accumulation plans sold through scheduled commercial banks. Jewellers would in no form be able to collect deposit even against advance receipt from retail consumers. Consumers will have an option to redeem this gold in the form of jewellery from jewellers empanelled by banks. Banks would be leasing or selling this gold to jewellers. Consumers would be able to use the same as collateral, it’ll be just as fungible as holding physical gold 24/7, they could liquidate at the hit of a button and transfer cash to their savings account.
Banks, if the opportunity so suggests, will export bullion sourced from accredited refiners. Refiners get accreditation, subject to adherence to predefined guidelines on refining and compliance related to sourcing; sourcing could be in the form of locally-sourced scrap, imported dore (unrefined gold) or gold mobilised through a revamped gold monetisation scheme. With more accredited refiners and an increase in the scale of operations, there will be stronger reasons for opening the Indian gold mining sector. Domestic bullion banks get to structure a financing arrangement between miners and refiners.
Economy first: Retail consumers’ trust in the system grows with banks and post offices in the distribution system. It brings an end to fraudulent practices, while not draining liquidity. There will be a gradual shift to investment gold than ornamental gold. There will be a significant shift to jewellery with higher value addition over plain gold; artisans would be a more dignified class of workers. A substantial part of the scrap market would have shifted to the formal sector. The network of vaulting and logistics companies would be on global standards, as volumes would support scale. Banks would have developed a local lease market, detached from international lease rates.
Through all these, traceability and accountability would be established across the value chain for a majority section of the trade. More importantly, gold imports would be current account-neutral.
Making it world-class: Look at the developed markets for gold, such as the UK (trading or supply market), the UAE, Switzerland, Singapore (centres for refining and trading), Turkey and China (closest we can relate India to). But China is battling gold being smuggled out at volumes more than volumes that get smuggled into India, while Turkey has its geopolitical uncertainties. India is just at the beginning of growth curve in gold supply chain—it is supported by lessons that highlight the importance of speed of transaction and settlement, traceability, better compliance and the significance of data analytics. Spot exchange is a means of getting to a more robust, organised, traceable and liquid gold market. But a spot exchange has to be supported with appropriate India good delivery standards, a robust gold monetisation system, and bullion banking supported by technology.
The author is chairperson, India Gold Policy Centre, IIM Ahmedabad