As history stands proof, no Government intervention has ever helped curb gold imports. The sovereign gold bonds scheme launched by the Government is fraught with risks
Once again, the country is mired in gold. like an average Indian, the Government too is obsessed with the yellow metal. This has been happening since independence. However, efforts by successive Governments to introduce a scheme has faced practical problems and has eventually lost glitter. The latest move to issue sovereign bonds linked to the bullion price in an effort to divert some demand for gold bars and coins and curb bullion imports are yet another move to tame the shrew.
The Reserve Bank of India will issue the bonds with an interest of around one to two per cent. The main idea is to reduce the demand for physical gold. The question is: Will the gold owners bite the bulletIJ A major obstacle to this is the emotional attachment that the family has with traditional jewellery. Besides, gold is mostly considered to be streedhan — a prized possession of a woman. Will any woman part with her gold to monetise it in an official rigmarole long-term processIJ
Even if a woman decides to pawn her 30 gm necklace to the bank, why will she do that for a mere one per cent interestIJ She will also have to justify the family possession. Also, there is no guarantee that she will get back her necklace. In all probability, she will get back a small gold bar. She does not fancy that. Indians prize gold as gifts and as a way to store wealth. The country is estimated to consume 900 tonnes or about 33 per cent of the total gold mined in the world. Gold is the second-biggest expense on the import bill after oil.
In May this year, the NDA Government proposed that banks treat gold deposits as a part of their cash reserve ratio, the share of deposits they are compelled to keep with the central bank, or the statutory liquidity ratio, the minimum amount of bonds they must hold. But the Government dropped the conditions after the RBI expressed fears that banks might hoard gold.
People have never liked or bought Government schemes ever since 1960s. When in 1962, China invaded India, to check the foreign exchange drain, former Prime Minister Jawaharlal Nehru used it as an excuse to sell gold bonds with a hope that people would turn in their gold as a mark of patriotism. As it failed, Finance Minister Morarji Desai came out with the Gold Control Act 1962, which recalled all gold loans given by banks and banned forward trading in gold.
In 1965, gold bond scheme with tax immunity for unaccounted wealth (black money) was launched. Very few opted for it. Moraji Desai finally introduced the Gold (Control) Act on August 24, 1968. This barred possession of gold bars and coins. All existing gold had to be converted into jewellery and declared to the Government.
Desai believed that Indians would respond positively and stop consuming gold to help save forex. It killed the official gold market and a large unofficial market sprang up dealing in cash only. Black market in gold flourished. Gold artisans lost their jobs and many families were ruined. In 1990, India had major foreign exchange problems and was on the verge of default.
The Chandrashekhar Government pledged 40 tonnes of gold from reserves with the Bank of England and saved the day. Subsequently, India embarked upon the path of economic liberalisation. The era of licencing was gradually dissolved. The gold market also benefited because Finance Minister Madhu Dandavate abolished the 1962 Gold Control Act on June 6, 1990. Dandvate liberalised gold imports on payment of a duty of `250 per 10 grams. The Government thought it more prudent to allow free import and earn the taxes rather than to lose it to unofficial channel. From official imports of practically nothing in 1991, India officially imported more than 110 tonnes of gold in 1992, which now stands about 900 tonnes in a year. In September 1999, the Government launched a gold deposit scheme to utilise idle gold and simultaneously give a return to gold owners and reduce the country’s reliance on imports. But this plan was not accepted.
Gold exchange-traded funds are also operating since March 2007. These have not become a roaring success as it was projected to be. It is also known that all imported gold is not for fancy jewellery. Imports serve to channelise undeclared earnings, that the Government now wants to curb through the law for curbing black money. Exporter under invoice whereas importer over invoice. This creates the so-called ‘illegal money’. This is routed by importing gold, which is disposed off in rupees as gold has insatiable demand.
Similarly, household gold has easy liquidity and can fetch prevailing market price any time. So, why should one opt for a cumbersome Government schemeIJ The only scheme that has succeeded is gold loan scheme. One gets easy loan of up to 75 per cent of the value of the gold as it is pledged with some finance companies.
The Government is in a fix. Monetisation is impractical. Raising customs duty or stopping imports are to encourage smuggling, apart from increasing gold prices. As history shows, no Government intervention has helped curb gold imports. The new scheme is very risky.