Gold and jewellery form part of ‘secret reserves’ of institutions and individuals. Until the government is able to establish its own credibility as a guardian of trust, there will be bickering
In my article “How about Re-visiting the idea of Gold Bank?” posted here on February 16, 2015, I had stated that “A change in approach to gold management can rewrite the India Growth Story to the country’s advantage” and listed the advantages of gold deposit accounts with banks asunder:
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.
After considering suggestions from many quarters like this and taking a view on the basis of studies by RBI and government, Budget 2015-16 included proposals to introduce a couple of schemes for exploiting the domestic gold stock to the country’s advantage.
The Union Cabinet on September 9, 2015 gave its nod for Gold Monetisation Scheme which envisages deposit of gold with banks by public and Sovereign Gold Bond Scheme which will make it possible to deposit cash in bonds which will have a growth path tracking gold prices. Both deposits will carry interest and will be for fixed tenures, extendable in certain situations. Let us await more details, which will be available as and when banks announce their schemes. This is a welcome beginning.
The response to the schemes from the media is mixed. From fear of taxmen dampening the willingness of investing public to hearty welcome to schemes that meet the twin-objectives of earning income from a ‘dead’ investment and allowing public to invest in ‘paper gold’ without the bother of having to ensure the quality of gold which one owns.
Trust and credibility issues
However, implementation of these schemes or taking forward any initiative to manage domestic stock of gold is not going to be very smooth. Mainly, there are several credibility and trust issues which are tricky. Gold and jewellery formed part of ‘secret reserves’ of institutions and individuals. Until the government is able to establish its own credibility as a guardian of trust, there will be bickering.
Though steps so far are in the right direction and may fetch some positive results, much more need to be done, if at least a substantial portion of the surface domestic stock of gold (latest estimate @22,000 tonnes) is to get into the mainstream. First and foremost would be restoring credibility in the institutional system (includes government) that will handle the yellow metal, if the present holders are willing to ‘sacrifice’ by temporarily parting with their prestigious possessions for the country’s economic growth. Two, there should be clear disincentives for hoarding gold stock, in whatever form and more particularly against misuse of the precious metal for showing off (this include building gold statues, gold-plating etc.). Government should also consider recovering at least a part of costs incurred for providing security for the huge stocks of gold and jewellery maintained by individuals/institutions.
But there are many ifs and buts in the process. The vested interests have their spokespersons everywhere. Without linking to these observations, let me quote a couple of sentences from the editorials that appeared today in two mainstream newspapers commenting on the two gold deposit schemes announced:
“€An amnesty made the gold bond scheme way back in 1998 attractive to investors, but amnesty is not an option today, after a government commitment to Supreme Court against future amnesties in 1997.”
“€If the government really wants the scheme to succeed, it may want to persuade income tax authorities to lay-off from closely scrutinising gold deposits. It must clearly prioritise what objective it wishes to pursue.”
Such warnings will naturally put any government in dilemma of sorts. But, how long law enforcement or legislative reforms, where necessary, can remain at the bottom of the priority list of any government? But, we hear such views from not only media, but from eminent economists also, when it comes to accumulated assets or assets flow from outside (including gold smuggling).
Without elaborating, let us pray to government to be transparent in its priorities, as institutional and government credibility will decide the success or failure of schemes like this.
(M G Warrier is former general manager, RBI, Mumbai and author of the 2014 book “Banking, Reforms & Corruption: Development Issues in 21st Century India” His email ID is [email protected]