A working group set up by the Reserve Bank of India has recommended ways to monetise the massive cache of idle gold stocks in the country and harness it for productive purposes within the economy.
At the same time, it has suggested a cocktail of demand reduction and supply management measures to moderate surging gold imports that have threatened to send the country’s current account deficit out of whack.
“Gold contributed nearly 30 per cent of trade deficit during 2009-10 to 2011-12, which is significantly higher than 20 per cent during 2006-07 to 2008-09. The large gold imports, thus, have led to major concerns in the macroeconomic management,” the report said.
“Projections show that net gold imports as ratio to GDP is likely to be in range of 1.8 per cent to 2.4 per cent in the next few years,” the report said.
The report said there was a need to moderate the demand for gold imports which amounted to 1,059.7 tonnes in 2011-12 valued at $56 billion. The report projected that imports could surge to as high as 1,410.4 tonnes valued at $79.36 billion by 2014-15 if demand grew at the rate of 10 per cent a year.
“Unless gold imports are converted into re-exports or volume of gold import does not moderate, increasing quantum of gold imports not only stresses India’s CAD but would also be a drag on India’s foreign exchange reserves,” the report said.
The report said fiscal measures to reduce gold imports ought to be revisited. “Beyond a level, raising the import duty may lead to buyers taking recourse to purchases from unauthorised sources of supply,” it added.
The report, however, noted that the import of gold had declined from 589 tonnes in 2011-12 (April-October) to 398 tonnes in 2012-13 (April-October). In value terms, it has declined from Rs 1.40 lakh crore to Rs 1.15 lakh crore. This decline was partly attributable to global economic conditions, slowdown in India’s growth, impact of increase in customs duty and softening of consumer and investment demand.The report suggested that there was a need to review the restrictions placed on gold imports by Indians living abroad in order to make it less attractive to bring gold into the country. It did not go into the specifics.
It also suggested the introduction of various savings schemes and instruments that could provide better real returns that would prove attractive to savers who usually use gold as a hedge against inflation. It said this could be analogous to inflation-indexed bonds.It also suggested the need to introduce new gold-backed financial products to reduce the demand for physical gold. The first could be a modified gold deposit scheme where gold taken as a deposit could be recycled to meet the domestic demand and given back at the time of maturity.It suggested a gold accumulation plan targeted at small buyers of gold in which the gold imports are deferred till the time of actual delivery of gold. It also proposed a gold-linked account where the entire transaction takes place outside India and the import of gold is not involved.
Finally, it proposed a gold pension fund where the customer surrenders gold to the bank under an agreement to receive streams of monthly pension till his death.Among other demand-suppression measures, the report suggested the imposition of an export obligation on bulk gold importers. It also wanted limits imposed on the volume and value of gold to be imported by the canalising agencies such as MMTC and STC.
The report said there was a need to increase the monetisation of idle gold stocks in the economy for productive purposes. This could be achieved by liberalising the gold loans by banks and gold loan non-banking financial companies (NBFCs). It also suggested the formation of a bullion corporation that would function as a backstop facility providing liquidity for lending against gold or as a refinancing agency.
The report said gold loan NBFCs do not pose a problem for domestic financial stability. The sources of funds of gold loans NBFCs do not appear to be an immediate cause for anxiety giving rise to concentration of credit risk. However, the striking growth of gold loans NBFC business in recent years warrants that their operations be closely monitored.