The Government and the RBI must initiate necessary steps to discourage people against excessive holding of gold
India is one of the largest markets for gold and growing affluence is driving growth in its demand. As per World Gold Council’s estimate in the year 2019, Indian households may have accumulated up to 25,000 tonnes of gold, thereby retaining the tag of the world’s largest holders of the metal.
In value terms, it may be worth more than $1300 billion.As gold cannot produce anything, it is an unproductive asset. Its growth in terms of value depends on the belief that someone else will pay more for it in future. If any investment is made in shares or debt instruments, it will contribute to the productivity and economic growth of the country.
A pile of gold will stay the same pile of gold no matter how much time passes. The only exception is when it is used in a small way in some industrial production.
Steps to curtail gold holding
At different points of time, the Government of India has initiated steps to reduce the holding of gold by the people. In 1965, a gold bond scheme was launched with tax immunity for unaccounted wealth. In 1968, the Government brought in the Gold (Control) Act to control sale and holding of gold in personal possession.
This Act enabled to recall all gold loans given by banks and to ban forward trading in gold. While launching economic liberalization the Gold Control Act was abolished on June 6, 1990.
However, the Government was contemplating different schemes to prune the holding of gold by the general public. The government is issuing a Sovereign Gold Bond Scheme and one can invest in gold without actually holding it. The investor can have equivalent value of gold on maturity and the bonds are tradable also. He can earn some interest also. However the government has collected only Rs. 31290 crore since its launch as per the statement of the Finance Minister in August 2021.
Then a new Gold Deposit Scheme was brought in through State Bank of India to enable people to deposit gold to the government, to earn interest during the scheme period and to get either gold bullion or cash equivalent on maturity. But as the investors have to melt the jewels to deposit gold, the scheme was not attractive to people. It seems that only big temples deposit gold by melting the jewels offered by devotees.
Loan facility against gold
When all these schemes failed to produce the desired result, it is strange that the RBI is allowing an enormous amount of loan facility against gold jewels from banks and NBFCs.
Loans against gold jewellery disbursed by banks rose from ?46,791 crore at the end of September 2020 to ?72,111 crore by September 2021 and ?80,617 crore by September 2022. As per RBI data, the outstanding loans against gold has nearly
doubled to Rs. 60,464 crore in FY21 as against Rs. 33,303 crore in FY20. As per RBI Bulletin dated 17 03 2022 outstanding as on 28 01 2022 is Rs. 69521 crores. The Y-o-Y 2022 growth was 32.9 per cent.
The outstanding with NBFCs on Advances to individuals against gold was Rs. 34678 crores in March 2020, Rs. 94840 crores in March 2021 and Rs. 114013 crores in September 2021. The percentage variation in 2020-21 is 173.5 as per RBI publication dated 29 12 2021.
It is strange that there is a tacit approval of the huge disbursal of jewel loans by NBFCs.
Need to prune lending against gold
No doubt that gold has a central role in the country’s culture and it is considered as a store of value, a symbol of wealth and status and a fundamental part of many rituals in our country. Among the country’s rural population, a deep affinity for gold goes hand in hand with practical considerations of the portability and security of jewellery as an investment. But all these do not make it a productive asset.
Shutting liberal lending against gold jewels will force people to liquidate their holdings. In fact there should be higher margin and higher rate of interest for such loans.
Outgo of foreign exchange Value of gold imported by India during the last three years was Rs. 3440.94 (FY 2022), Rs. 2542.88 (FY 2021) and Rs.1992.50 (FY 2020).
We normally import up to 1,000 tonnes of gold every year, and it is estimated another 200 tonnes are added through unofficial channels. There is substantial outgo of foreign exchange for import of hold.
Time to act
The Government and the RBI must initiate necessary steps to discourage people against excessive holding of unproductive assets like gold. Outright ban may not give the right solution as it will be counter-productive.
(The author is a retired banker)
