A TAR­NISHED AP­PEAL

In­dia’s gov­ern­ment tries to curb im­ports of gold—again

The Financial Express - - FRONT PAGE -

In­dia’s gov­ern­ment tries to curb im­ports of gold — again

ASMALL room on the eighth floor of Mum­bai’s for­mer cot­ton ex­change is where jewellery goes to die. At the Mas­ter Bul­lion As­say­ing & Hall­mark­ing Lab in the heart of the gold dis­trict, su­per­heated cru­cibles melt elab­o­rate ban­gles and ear­rings into bars a cen­tral banker might recog­nise. This alchemy is be­ing promoted by the gov­ern­ment un­der a new “mon­eti­sa­tion” scheme de­signed to re­duce In­dia’s im­ports of gold: the melted bling can be traded for a bond which will re­turn the same amount of gold sev­eral years down the line, with in­ter­est of up to 2.5% in the in­terim.

Gold is the bane of In­dia’s ex­che­quer. In­di­ans vie with Chi­nese as the world’s big­gest con­sumers, buy­ing just un­der 1,000 tonnes a year and stash­ing it in an­klets, safe-de­posit boxes and Hindu tem­ples. As all but a few ban­gles’ worth is im­ported, only oil ac­counts for a big­ger share of In­dia’s trade deficit. To put it an­other way, the im­ports cost In­dia more dol­lars ev­ery year than it at­tracts from for­eign in­sti­tu­tions in­vest­ing in stocks and bonds, points out Ajit Ranade, an econ­o­mist.

Al­though In­di­ans have tra­di­tion­ally used gold as part of a bride’s dowry and as an of­fer­ing at tem­ples, de­mand has bal­looned in re­cent years. In 1982 they con­sumed just 65 tonnes of the stuff. Decades of in­fla­tion and a muchde­based ru­pee have pushed savers to­wards what is, in ef­fect, a con­ve­nient way to in­su­late their nest-egg from the poor de­ci­sions of In­dia’s pol­i­cy­mak­ers (and, just as of­ten, from its tax in­spec­tors). In ru­pee terms, in other words, gold has been a stel­lar in­vest­ment.

Get­ting In­di­ans to forgo gold for wed­dings and re­li­gious of­fer­ings is prob­a­bly a non-starter. Eas­ier to tar­get the por­tion that is bought as an in­vest­ment, es­pe­cially in ru­ral ar­eas where banks are scarce and mis­trusted. The gov­ern­ment hopes it will gather 50 tonnes of gold through its bond scheme—a mod­est tar­get given the coun­try’s 20,000-tonne pile. Yet four months in only three tonnes have been gath­ered.

That is hardly a sur­prise: gov­ern­ment schemes to col­lect gold have dis­ap­pointed since at least 1962, when Indira Gandhi, then the prime min­is­ter’s daugh­ter, handed over her own fin­ery to finance a bor­der skir­mish with China. Though gold and a gov­ern­ment bond backed by gold are much the same on pa­per, they do not hold the same ap­peal for those who favour gold as a store of value. In­di­ans who are com­fort­able with pa­per­work and banks sim­ply aren’t big hold­ers of gold, points out Gur­bachan Singh, an econ­o­mist at the In­dian Sta­tis­ti­cal In­sti­tute. By the same to­ken, most Hindu tem­ples, many of which have hoards of gold do­nated by the pi­ous, have steered clear of the scheme, de­spite pres­sure from the gov­ern­ment.

Pol­i­cy­mak­ers have other ways of mak­ing gold less ap­peal­ing. A mod­est ex­cise tax in the re­cently un­veiled bud­get has kept jewellers across the coun­try on strike for a month. Gold sell­ers were al- ready fu­ri­ous at im­port du­ties and rules forc­ing them to iden­tify cus­tomers buy­ing more than 200,000 ru­pees’ ($3,000) worth. In ad­di­tion, the cen­tral bank is dis­cour­ag­ing lend­ing to buy gold.

Sev­eral trends sug­gest gold may even­tu­ally lose its lus­tre. In­fla­tion has fallen dra­mat­i­cally, re­duc­ing its value as a hedge. A gov­ern­ment scheme is giv­ing hun­dreds of millions of peo­ple bank ac­counts for the first time, pro­vid­ing them with an al­ter­na­tive way to save. Young peo­ple are said to be less in­ter­ested in wear­ing gold jewellery than their par­ents.

If the gov­ern­ment re­ally wanted to ac­cel­er­ate this shift, it could change its own ways. Var­i­ous laws steer a big share of bank de­posits into low-yield­ing gover nment debt and agri­cul­tural loans. That, in turn, means that In­di­ans ear n lit­tle in­ter­est on their sav­ings, en­hanc­ing gold’s rel­a­tive ap­peal. Such fi­nan­cial re­pres­sion helps the gov­ern­ment fund it­self cheaply. But it means that In­di­ans are sit­ting on gold equiv­a­lent in value to four months of eco­nomic out­put. That could be fi­nanc­ing pro­duc­tive in­vest­ments in­stead.

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