The finance minister, in the previous Budget, had announced the gold monetisation scheme (GMS), hoping to put the high stock of ‘under the pillow’ gold into circulation, thereby reducing the adverse impact of gold imports on the current account deficit (CAD). But the scheme met with little success. Now the government has tweaked some of the parameters, hoping for a better response from the public.
The need for GMS is obvious. About 20,000 tonnes of gold is held in India, mostly as hoardings or in temples and other religious institutions. If a significant percentage of this gold is monetised, then the benefit to the economy will be substantial. It will reduce CAD, spur investment in various sectors including real estate, and boost consumption. All these will have multiplier effects, leading to greater employment generation, which may yet prove to be the greatest bane of this government.
The previous governments had also hoped to reap the benefits of such a scheme. The 1999 gold deposit scheme was an abject failure and could not achieve a modest target of even 50 tonnes. It appears the current scheme is headed in a similar direction. Excluding deposits from temple trusts and other similar institutions, gold mobilised from the general public has barely crossed the double-digit kg mark. In order to understand the lack of success of these schemes in India compared to Turkey and China (where the population has similar affinities to gold), it may be useful to examine the incentives for various stakeholders: the government; public; banks or other such depositories; and jewellers.
Clearly, the benefits to the government are significant and obvious. For the public to participate in such a scheme, the conditions need to be articulated—individuals have to be paid a reasonable return, they should be able to redeem it when required, they should be protected from investigations and assured of getting value for money in terms of purity of their gold. As far as banks are concerned, they have to be assured of the quality and their payout will have to be less than the payout of any other deposit (including transaction costs and cost of storage). The jewellers will only participate in such a scheme if in terms of quality the gold available locally is cheaper than the landed imported cost.
A common requirement for all the stakeholders is testing standards for quality. Establishments have to be set up across India which can reliably, quickly and efficiently determine the quality of gold that an individual may want to monetise and the bank agrees to accept. Ensuring local products meet global standards has to be the cornerstone of Make-in-India. Whether it’s mangoes, seafood or gold, it is impossible to build the India brand without meeting global standards and even a single failure can jeopardise the entire programme. Indeed, it is a matter of shame that when gems and jewellery constitute over 15% of our manufactured exports, these have to be certified for quality overseas.
Thus, it is imperative that the government puts in place a credible infrastructure for testing and certifications. We don’t need to reinvent the wheel. Most countries follow the standards set by the London Bullion Market Association (LBMA). We can easily adopt LBMA practices for assurance in gold.
Unfortunately, some of the policies announced in this year’s Budget will have unintended consequences and impede the establishment of a rigorous standard for gold purity in India. For example, the proposal to increase excise duty on refined gold bars manufactured from ‘gold dore’ from 9% to 9.5% will reduce the gross margins of refineries in excise-paying area from 1% to 0.5%, making them unviable. This will have an adverse impact on CAD and employment. As far as revenue collection in concerned, it will kill the proverbial goose that lays the golden egg. Also, with the withdrawal of excise duty exemption in excise-exempt areas prospectively, no new refineries would be set up. This will negatively affect Make-in-India. Moreover, this will lead to near monopolies in gold refining and thus the incentive for setting global standards for quality will reduce (with negative consequences for GMS).
These proposals are a step in the wrong direction for the economy in general and for gold refining and GMS in particular. The same objectives can be achieved by maintaining the differential between customs duty on imported gold and the excise duty on gold dore refined in India. It is not the absolute numbers but the differential that is important. So if the customs duty on imported gold is increased to 11%, the countervailing duty on gold dore increased to 9.75% and the excise duty on gold refined from gold dore increased to 10%, the gross margin will remain at 1% and domestic refining will not be affected. It may have the added benefit of reducing gold imports, since it will encourage setting up more refineries in India. There is still time to take corrective steps.
The author is former secretary, ministry of heavy industries