The FM’s gold schemes will not control gold imports. This simple measure will

To reduce gold imports what is required is a level playing field for gold and non-gold imports and not gold schemes as proposed by Arun Jaitley in the Budget


India needs to reduce gold imports, which were the single cause of the unprecedented over 30 year-high current account deficit of 4.7% of GDP in FY 2013 with gold imports accounting for more than 3%. The Finance Minister Arun Jaitley has proposed two important measures in his budget speech, to control gold imports. These are:
(i) Gold Monetisation Scheme, which will replace both the present Gold Deposit and Gold metal Loan Schemes. The new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal account. Banks/other dealers would also be able to monetize this gold.
(ii) Also develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond.
Unfortunately, these two measures will not work. Take the first one. India has 20,000 tonnes of domestic stock of gold. Can it be monetised as the minister announced? Globally, deep and liquid metal gold deposit and lending markets exist but only for two reasons, the first being active trading and the second gold miners borrowing metal gold to raise money at ultra-low interest rates to fund their capital investment in either new mines or in expansion of their existing mines. And there is no third reason for this.
The dynamic of the global gold deposit and lending markets in New York, London, Singapore and Hong Kong involves gold borrowing demand coming from short sellers and large gold miners. In particular, short selling arises from speculators, hedge funds and other participants betting on declines in gold price so that they can make profit from their bet coming right by buying back gold at a price lower than the price at which they originally short sold and repaying the metal gold loan. But since, there is the market discipline of delivery into a short sale, short sellers have necessarily to borrow metal gold to deliver into the short sale, which gets adjusted after some time, when short sellers either buy metal gold back to cut their losses due to stop loss limits or to book their profits and using the gold so bought back for repaying the borrowed gold. 
Another reason for short selling metal gold is engagement by market participants in cash futures arbitrage when gold futures are cheaper relative to the spot market i.e. when no-arbitrage argument/ law of one price of derivatives is violated. What then they actually do is buy cheaper gold futures and short sell expensive gold in the spot market and carrying the arbitrage trades into maturity and earning totally risk free profits due to such mis-pricing. Such arbitrage trades continue until, as a result of these trades, such price discrepancy eventually disappears. 
Since globally there is large-scale demand for such borrowed metal gold, supply comes from gold deposits and like in any bank deposit and loan market, there are deposits and lending/ borrowing rates known as gold lease rates. These are way too low compared to currency rates because they are in theory and practice nothing but the difference between the uncollateralised currency interest rates and those collateralised by metal gold. Specifically, when gold is short sold, the sale proceeds of short sale are used by the short sellers to collateralise their borrowing of metal gold borrowing, which amounts to lending by short sellers of cash from short sale to metal gold lenders at an interest rate lower than the interest rate they will lend at otherwise. The more desperate the metal gold borrowers are to borrow, the less interest rates they will charge to the lender of the metal gold and so much higher will be the metal gold lease rates. 
On the other hand in an aggressive bull market in gold, when prices shoot up, the demand for borrowed gold will relatively be far lower and therefore, gold lease rates will be lower and can be, and have indeed been, negative. These gold lease rates are in both theory and practice a fraction of a currency’s interest rates. 
Illustratively, currently these are 0.09%, 0.11%, 0.15%, 0.25% and 0.40% for one month, two months, three months, six months and one year, respectively. Incidentally, in the Indian context, there has been frequent demand from some quarters that interest rates paid on gold deposits should be higher than currently paid without appreciating the fact that each asset has its own yield curve. Like for example, just as you cannot pay Indian rupee rates on yen and dollar deposits, so also you cannot pay Indian rupee interest rates on gold deposits. 
Coming back to gold lease rates, they have also been negative during the episodes of aggressive bull market in gold when lenders of metal gold far exceed the borrowers of gold to a point that lease rates become zero but there are still storage and insurance costs, which make effective lease rates negative! 
Other than short sellers and arbitrageurs, there is only one more kind of metal gold loan borrowers, namely, large gold miners. They borrow metal gold for longer periods to sell the metal in the spot market and use the sale proceeds to fund capital investment in new mines or in capacity expansion of their existing gold mines and have a natural hedge against gold price rise. This is because they use the metal gold mined to repay their metal gold loans without any price risk and thus have the natural advantage of raising capital at a fraction of cost of debt and equity capital unlike other non-gold businesses. 
Significantly, as regards lending gold to jewellers, to call it a metal gold loan is an oxymoronic misnomer. This is because, effectively and substantively, it is simply nothing but a sale and purchase transaction as both in finance theory and practice, a deposit and lending transaction is one where whatever is borrowed has necessarily to be repaid. To that extent, it is no brainer to that the proposed monetisation scheme will not deliver because any genuine depositor of any asset would want his deposit back on redemption and maturity date and not sell it in the first place.
The Sovereign Gold Bond Scheme is, in its design and logic, is exactly like a Gold ETF. The difference is that the latter does not pay any interest but delivers gold returns to investors by investing the entire proceeds of subscription in metal gold, which is held in demat form.
Significantly, all the 14 Gold ETFs in India, between them, hold no more than 40 to 50 tonnes of gold, which is a mere 5% of annual gold imports of 800 to 1,000 tonnes mentioned by the Finance Minister! 
Therefore, a gold ETF does not at all reduce metal gold demand. All it does is to substitute gold demand from individual metal gold investors with like demand from a professionally and expertly managed gold ETF instead! Exactly so will also be the case if the Government does the same to deliver gold returns to Sovereign Gold Bond holders on redemption. 
In the highly unlikely event of the Government, even remotely contemplating using the subscription proceeds for a purpose other than investing only in metal gold, will expose the government to extreme price risk, as it will be committed to delivering gold returns to bond investors, on redemption, at the ruling gold price. Remember, gold price moved from an all-time high of $850 per oz. in late ‘70s to a life time low of $270 in the early 2000 and then to an all-time high of $1,920 in September 2011. 
So to conclude whether the proposed gold deposit and lending scheme will deliver in practice will depend critically on whether we have in India both active gold trading involving, as I said before, short selling and arbitraging and gold mines of global scale. And as we already know the above necessary and sufficient conditions are not satisfied in the Indian context. In view of the foregoing reasons, both the Sovereign Bond Scheme and Gold Monetisation Scheme will not deliver. What, however, will is what actually and effectively did only as recently as in 2013-14 , that is, restoring by RBI of the status quo ante by again creating level playing field between gold and non-gold imports by stopping gold imports on 1) consignment basis 2) unfixed price basis and 3 ) metal loan basis ! 
What Will Work?
What will reduce gold imports is putting it at par with non-gold imports. Remember, gold imports surged because under the then current import regulations (of RBI’s FEMA Master Circular), there was preferential, and more favourable, treatment for gold imports as compared to import of any other item, including essential imports. Gold import was permitted 1) on consignment basis 2) on unfixed price basis and 3) metal loan basis. 
This preferential treatment made gold imports free from both price and currency risks for overseas consignors of gold borrowed overseas as effectively it amounted to their short selling such borrowed gold in India and simultaneously covering their short position abroad, with both the risks being borne by end buyers of jewellery and gold exchange-traded fund (ETF).
This was not the case though with other items, say, coal and edible oils, imported on direct import basis. I had accordingly, in December 2012, suggested to the then Reserve Bank of India (RBI) Governor, Dr Subbarao and the present Governor Dr Raghuram Rajan, then Chief Economic Advisor, Ministry of Finance, to create a level playing field between gold and non-gold imports by aligning gold import regulations under Foreign Exchange Management Act (FEMA) with those for non-gold but essential imports. 
And indeed, aligning gold import regulations with the rest of imports by RBI had the desired effect of taking away this significant, unwarranted and perverse incentive. It delivered the desired outcome of dramatically reducing gold imports in double quick time, merely by creating a level playing field between the two kinds of imports so much so that as its direct consequence, the current account deficit (CAD) narrowed dramatically to 1.7 % of GDP in FY 2014! 
And this was achieved, as I said, not by imposing curbs and restrictions on gold imports, as was widely made out in media campaign by some quarters, but merely by creating a level playing field between gold and non gold imports and by aligning gold import regulations under FEMA 1999 with those for non-gold, but essential, imports like, as I mentioned above, edible oil and coal.
However, surprisingly, the RBI, only recently, rolled back these entirely wholesome and fair measures. No wonder, according to media reports, gold imports have again surged and the CAD for the latest fiscal quarter has increased to 2.1% from 1.2% of the GDP. 
(VK Sharma is Former Executive Director of the Reserve Bank of India) 



Mahesh S Bhatt

2 years ago

Sir respect good article.But Govt sells free land with 114 types of costed corrupted corruptions creating property bubbles.

So is the scene in Stocks/Commodities (Oil is latest classic eg)/lastly Onions/Potatoes shoots up for defeating electoral opponents(check with Ms Sheila Dikshit).

World is in mini World War III with 31 countries fighting ISIS & another 30 supporting.+6 countries attacking Yemen.

Russia has sanctions for attacking Ukraine.

Pray for safe life when World leaders are busy hurtling the world at fast pace into Greater than Great Depression on 1930.

All media is sold/bought by Government & Business with paid news.


Finally revolutions shall bring in the level play in aggressive /painful ways.

Currencies are also manipulated globally.

Engineers are also trying Cryptocurrencies Bitcoins to bypass corrupt Governments who bail Big corps but challenge is that who controls/who regulates??

So God sent Gold becomes simple safe emergency back up.

Donot think too much because its proven universal cash currency


Sree Iyer

2 years ago

Why not limit possession of Gold to 1kg. per family & make all excess gold to be declared and kept in RBI so GOI has a firm grip over World price of Gold? If it goes way up, RBI can sell Gold in the International Market and if it plummets, stock up. India consumes close to 25% of the all Gold manufactured in the world and can easily enforce price discipline in the World market.


MG Warrier

In Reply to Sree Iyer 2 years ago

Excellent suggestion. To begin with, GOI or any organisation with necessarysupport from state and central governments need to make a realistic estimate of surface gold stock in India with individuals, institutions and others. There should be a national consensus on stopping abuse of gold for 'show off'. It is intriguing that in a country government records are maintained for every cent of land, and several other assets valued at low levels there are no transparent records maintained about the surfacegold stock the aggregate value of which is in billions of dollars.

Gopalakrishnan T V

2 years ago

The FM's measures on Gold may not help to lessen gold imports as such but in the long run if the measures intended are seriuosly implemented and they get stabilised, the attraction to import gold will be on the decline as the domestic supply of gold by simply allowing monetisation of local gold will enter the market and the other measure ie marketing of sovereign Gold bond will very well take care to absorb the monetised gold to develop gold bond market as well. The FMs gold policy has multi pronged objectives to curtail black money generation by freely investing in Gold, find adequate resources for infrastructure developmentthrough monetisation of gold, encourage banking habit by having deposit against gold and have some earnings and development of a gold bond market to widen and deepen the bond market. The idea is to curtail non essential gold imports so that the essential immports of non gold items can be taken care by the money saved therein. No new forex needs to be found and CAD can be maintianed at a comfortable level. More than the monetary aspets, the craze for Gold to cover up black money and other undesirable social needs can be tackled to a great extent if the gold hoardings enter the market in a big way.

MG Warrier

2 years ago

It is comforting to see that the debate on gold management is getting more participants. On the eve of Budget 2015-16, my article concluded with the following observations:
"Once the government musters the political will to recognise gold as a national resource, the whole scenario of India Growth Story will change for the better. The advantages are:
1) When some banks start opening gold accounts, they will also be able to maintain more liquid assets under Section 24 of the Banking Regulation Act, 1949(the section requires banks to maintain a certain percentage of their liabilities in cash, gold or unencumbered approved securities) in gold.

2) Individuals and institutions will be encouraged to keep their gold stock with banks thereby reducing misuse(Now for the rich, gold is a medium to show off their wealth- Not only in the form of jewellery, but by erecting statues and flag masts in solid gold-less said about the malpractices practiced in such transactions, the better!)

3) Need to import gold will get considerably be reduced resulting in saving precious foreign exchange.

Budget 2015-16 is an appropriate medium for Modi government to think loudly on the above lines."


2 years ago

I disagree. The only way to halt Gold Imports or Smuggling into India is to have honest governance. A Governance that builds a track record of not expropriating the extremely hard earned, net of extortion-corruption savings of Indians through Inflation and other forms of taxation to fund Government corruption and profligacy. To build such a track record may take decades and a framework of reliable laws that enforce accountability and fair play, starting with detoxifying India's "social engineering" Constitution. Today Gold is the only reliable liquid store of value for an Indian.

NYC Public Housing: Fixing a Leak with a Bucket

The New York City Housing Authority, the country’s largest public housing agency, says it’s made major progress responding to residents’ requests for repairs. Residents tell a different story 


At Maria Santana’s public housing apartment on New York’s Upper West Side, dirty, black water has periodically poured in from the walls, from the pipes, from the radiator. She says the problems started two years ago.
“It’s so much water, it looks like it’s raining in here. I am scared,” Santana said. She has placed buckets throughout her apartment. Her couch is covered in plastic to keep it from getting wet.
Santana, 60, says she lives in fear that dripping water will come down on the electrical outlets and start a fire. She’s taped and covered some of her outlets with plastic as a precaution. 
Her red folder is a testament to how many times she’s tried to get help from her landlord, the New York City Housing Authority. Inside, scrawled in Spanish and broken English, are long lists of ticket numbers and notes from her calls to NYCHA’s hotline. Workers would come to the apartment sometimes and make small fixes, she said, but they never actually solved the problems. 
“They gave me ticket, ticket, ticket, ticket, ticket,” Santana said, paging through her papers. “Over here too, ticket, ticket, ticket, ticket. They just give you tickets. But they don’t do nothing.” (NYCHA’s media office declined ProPublica’s requests for updates on specific tickets, directing us instead to make formal records requests.) 
Santana, who’s been in public housing for more than two decades, has seen the decline of the NYCHA, which was once considered one of the nation’s best-run housing authorities. The agency, which is the country’s largest public housing authority and home to more than 400,000 tenants, has suffered from a decade of underfunding and aging infrastructure. 
To hear NYCHA officials tell it, though, the agency is making strides despite continued underfunding. Officials speak of improved customer service and quicker repairs. In recent years, NYCHA has issued press release after press release about its progress in clearing out a backlog of 330,000 repair requests, cutting it down by as much as 95 percent.
"If you call us with a leak on Monday, what we’re saying is we’re going to send someone to your house within seven days,” NYCHA General Manager Cecil House told ProPublica. He said that the agency’s expectation is that even complex repairs of apartments should take about 15 days. 
“While NYCHA is a very large and complicated organization with more work to do,” House said, “I do think we’ve made a lot of progress.”
But residents and NYCHA’s own numbers offer a more sobering picture. Residents, housing attorneys and community advocates say that across New York City’s public housing developments, they’ve continued to fight for months, even years, to get the agency to fix falling paint, moldy walls and water leaks. 
“It’s not true. Let me just state that emphatically. It’s not true that repairs are getting handled in much of a different way than they’ve been handled in the past 20 years,” said Grant Lindsay, a community organizer affiliated with the Industrial Areas Foundation, a network of religious congregations and community groups. 
Judging by the agency’s own metrics, while the housing authority has done better in some areas, it’s still performing far below expectations. Basic maintenance in February, on average, took about twice as long as the seven-day target, and longer than it did a year ago. A plumbing job, on average, took 49 days. A paint job took 53. Plaster work? 63 days.



Land bill in sync with environment: PM

PM Modi said environment protection and development can go "hand in hand" but expressed disappointment that "lies" were being floated around in this regard


Seeking to scotch "lies" about the controversial land acquisition bill, Prime Minister Narendra Modi on Monday declared that it rather synergized India's growth imperative with the need to protect the environment as tribal and forest land has been kept out of its purview.
Inaugurating state environment and forest ministers' conference here, Modi said environment protection and development can go "hand in hand" but expressed disappointment that "lies" were being floated around in this regard.
Giving the example of the land bill, he said: "The provisions of the bill do not touch tribal and forest land. But serious misconceptions and lies are being spread about it."
He urged those spreading such "lies" to desist from doing so and added that their attempts to "misguide society are harming the nation".
The two-day conference, also attended by union Environment Minister Prakash Javadekar, seeks to focus on issues of air pollution and confer better techniques of solid waste management and sewage water treatment.
It will also discuss the recommendations of a report by a high-level committee, headed by former cabinet secretary T.S.R. Subramanian. The committee recommended that country's green laws be reviewed.
Reflecting on the union environment ministry's expectations from the meet, Javadekar said he hoped all states would partner with the central government in its effort to protect the environment.
"We have planned for quite an intensive interaction on all important issues of forest and environment conservation. We will definitely have a good, working outcome," Javadekar told IANS.
Modi also said India was ready to take the lead in fight against climate change but "people who lecture us on environment and the use of cleaner energy don't give us nuclear fuel (for clean energy)".
"These are double standards," he said, adding that India has to take lead in thinking of ways to protect the environment.
"We must think of traditional methods to tackle environmental issues. There can be green solutions in our age-old traditions," he said.
The prime minister sought to clear the "wrong impression" of India that it was not serious on environmental issues, saying the country had a culture in which the environment was equal to the divine.
Modi urged urban bodies to focus on solid waste management with programmes to generate wealth from it, adding that such authorities could recycle waste water and send it to farmers, who in turn would make use of it and provide other services like growing organic vegetables, which would make life easier for all.
The prime minister, who was presented a report on the status of tigers in India, expressed satisfaction on the increase in their number, adding that it reflects "India's commitment to respect for nature".
He also released a "Standard Terms of Reference for Environment Impact Analysis", which was described by Javadekar as a step towards ensuring "ease of doing business".
Modi also launched a National Air Quality Index, which will enable people across India to track the quality of air they breathe with the click of a button.
Available on the ministry's website after the launch in 10 cities in the first phase, the colour-coded index indicating air quality will provide real-time data detailing the level of pollution in a given city.


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