The big plus of the proposed Gold Monetisation Scheme (GMS) is that it thinks of the consumer. It makes it possible for her to use small pieces of gold for generating income or accumulating more gold. Life will also become easier for the jewellery industry that gives two million jobs.
The GMS requires three pillars to be successful. One, India should have a clutch of refineries that meet credible process and corporate governance standards. There are 17 refineries in the country. But we lack a certification standard for refineries against which they can be assessed by banks wanting to hire them.
Only one Indian refinery has been approved by the London Bullion Market Association, whose standard is globally accepted. Until Indian standards are set, banks won’t move. Refiners run on wafer-thin margins anyway. They won’t be keen to participate without a hefty processing fee.
Second, the scheme needs a buy-in from the banks. They will not accept certificates based on gold assayed by a Bureau of Indian Standards-approved outlet without adequate checks and balances. They will also need clear-cut rules on who is liable in any dispute about quantity and quality of gold left by the consumer with the testing centre. The scheme allows banks to trade on commodity exchanges. The big question is, will the RBI agree?
Third, for the consumer, the scheme will operate exactly like a fixed deposit, with tax-free interest. If the rate of interest is meagre, they are unlikely to go laughing all the way to the bank. A gold deposit plan run by the State Bank of India since 1999 managed to draw just 15 tonnes because of a requirement to deposit a minimum 500 g and low interest rates of 0.75-1 per cent.
Rural consumers are going to be left out until the scheme expands geographically. More importantly, there is no guidance on how the taxman will treat large deposits of under-the-mattress gold. Since no amnesty scheme has been announced, people may take the view that only the paranoid survive and stay away.
Once the scheme takes off, the gains to the economy can be impressive. India can reduce its dependency on imported gold. The abundant physical supply will remove the artificial premium due to scarcity charged from consumers. A national gold bullion standard and certification process will develop that can match global benchmarks.
Jewellers will be able to reduce leverage and debt. Jewellery exports will rise due to greater availability of raw material. Banks will be able to free up cash by depositing gold as part of their reserves with the RBI. The RBI can shore up its bullion reserves by purchasing recycled gold. Customers can rationally evaluate the returns from gold versus other asset classes.
There will be an official national market for gold coins and bars, including the official Ashok Chakra coin and those issued by certified refiners, which will be traded as paper on commodity exchanges. In short, the policy has the potential to infuse transparency and energy into a troubled and fragmented sector.
And yet, we expected more. India is the world’s largest importer of gold. Our festival demand and rural demand moves the international price. But we have never leveraged this pole position to our advantage. What we need is the larger vision of how the government plans to tilt the axis of power from the West to the East in the international gold market.
As always, China is leading the way. Chinese regulators have pushed open up the country’s gold trade to foreign investors to make the yuan more international. Last September, it established a yuan-denominated spot gold trading platform and a corresponding settlement system in Shanghai’s freetrade zone to increase China’s influence over worldwide bullion prices.
The presence of international refineries, bullion banks and trading houses has made it a serious competitor to the duopoly of the London Fix and the New York gold futures market. There is certain to be Chinese fixing price before the end of the year and rapid development of a Chinese gold options market.
India too needs a plan to use gold as political chips on the world’s financial poker table. Without it, we will remain outside with our nose pressed against the glass, watching the big boys play. The proposed GMS will just help to keep our noses clean.