Reimagining India’s Gold Policy
At the Nikkei Future of Asia Conference in Japan last month, the Malaysian prime minister Dr Mahathir Mohamad floated the idea of creating a gold-backed common trading currency for all of East Asia. He opined that “if we have a common currency for East Asia, a common trading currency that is not used in each country but for the purpose of settlement trade only, then there will be stability.” He also added that “[w]e can make settlements using that (new) currency (using gold). That currency must relate to the local currency as to the exchange rate, and that is something that can be related to the performance of that country. That way we know how much we owe and how much we have to pay in the special currency of East Asia”. 
Discussions for reform in international monetary arrangements have been in vogue since the financial crisis of 2008. At the heart of this discussion is a gradual move towards a reserve system which is more stable and reflective of the current international economic situation. It is in this new arrangement that gold may have a major role to play. Thus the proposal put forth by the Malaysian PM is perhaps the most vocal and straight in this respect. 
If the proposal finds traction, then it will have far reaching implications in the evolving Asia-Pacific calculus. If this region does moves towards a gold backed common trading currency, then for India, which is invested in this region with a GDP of $2.8 trillion through its Act (Look) East Policy, will face tough choices and tradeoffs - both in economic and geopolitical terms.   
Developments such as these do not stand in isolation. The history over the last 10 years suggests that there is a perceptible change in the strategy of many central banks in respect of gold. Geopolitics is silently shaping the demand for gold, with central banks across the globe making net purchases in gold. In 2009 India purchased approximately 200 tonnes of gold which is currently parked abroad. By 2013 central banks made around 370 tonnes gold acquisition. Russian Central Bank exited most of its US treasury holdings in April 2018, substituting it with gold and is now exploring the options of a gold-backed cryptocurrency. 
In total, the world’s central banks accumulated 651.5 tons of gold last year. According to the World Gold Council, 2018 ranked as the highest level of annual net central bank gold purchases since the suspension of dollar convertibility into gold in 1971.
Purchase of gold is just one of the many components of the revival of interest in the ‘barbaric relic’. In January 2013 the Bundesbank (German Central bank) contemplated repatriating nearly half of its gold lying in custody with the Federal Reserve at New York. The OeNB or Austrian National Bank will complete its repatriation campaign for half of its gold reserves stored in the Bank of England by 2020. Peoples Bank of China, the most aggressive in purchasing gold, has an elaborate strategy to develop deep markets in physical and paper gold. The Belt and Road Initiative has a Silk Road Gold Fund operated by the Shanghai Gold Exchange to holistically develop gold markets across Central Asian countries along the silk route. Then in the United States itself, since 2011, eleven states have passed legislation recognizing gold and silver as legal tender, a move that allows the public to make transactions using precious metals in place of cash.
However, the above developments, when compared with the approach adopted in India, paint a somewhat incoherent picture. Discussions on India’s national policy on gold had an on-and–off start many times. To begin with, there has never been a stated policy. Moreover, the recent policy action, if any, has been influenced by the current account deficit (CAD) obsession.  As a result, policy objectives have become too narrow at the expense of the larger picture. For instance, because of the CAD obsession, the idea that private gold reserves is an effective complement to national reserves for the maintenance of the country's financial security has never foundfavour. It has never occurred to the authorities that private holdings of gold can be effective in hedging household savings from geopolitical risks. While self-invested personal pension in the UK allow individuals to hold gold in pension accounts, the same facility has not been made available to Indian under the national pension scheme (NPS). 
The report ‘Transforming India’s Gold Market’ by Niti Aayog follows the similar old line and talks about exports and financialisation of gold, completely oblivious of the strategic undercurrents as noted above. It is not the contention that this report has no positives but it does fail to imagine the larger picture and ascertain the place/role of India in global scheme of things, particularly in relation to India’s global power status. 
Hence, the new government in its second term, must place the agenda of a comprehensive strategy on gold on high priority. The long term strategy must cover not just the commodity aspects of gold as elaborated in the Aayog’s report but also its possible role in monetary, technological and medical domains. This strategy must also factor in the international developments as highlighted above and India’s policy response to such developments. 
To conclude, it is all but certain that trade wars and global uncertainty will continue for protracted periods and the role of gold in securing financial stability and household wealth preservation cannot be understated.  
(The writer is an economist in the banking sector. Views are personal)


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GDP Overestimated, Growth during 2012-17 at 4.5%: Ex-CEA
The growth numbers have come back to haunt the government with former chief economic advisor (CEA) Arvind Subramanian also questioning the change in GDP calculation methods and numbers effected last year.
In his recent research paper published by Harvard University, the former CEA has said there is a possibility of substantial overestimation in the growth figures while stating that the actual GDP growth between 2011-12 and 2016-17 was around 4.5% as against 7%. 
"A variety of evidence suggests that the methodology changes introduced for the post-2011 GDP estimates led to an over-estimation of GDP growth", he said.
Dr Subramanian has suggested that India's gross domestic product (GDP) growth estimate has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17, a period that covers the years during both the UPA and the NDA governments.
The adotion of a new GDP series to measure the country's economic growth, months after the government itself slashed previous UPA-era GDP growth rate for 2010-11 from the earlier estimated 10.3% to 8.5%, has fuelled controversy. 
Dr Subramanian said: "This paper shows that India changed its data sources and methodology for estimating real gross domestic product (GDP) for the period since 2011-12. This change has led to a significant overestimation of growth." 
"Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7%. We estimate that actual growth may have been about 4.5% with a 95% confidence interval of 3.5% - 5.5%," the research paper added. 
The ex-CEA says there was "Proxying Informal by Formal Activity". 
The informal sector accounts for 30% of manufacturing gross value added (GVA - excludes taxes) and hence about 5% of overall GVA. According to the paper, this proxy might be reasonable in normal times. But it likely overestimated growth during a period when major policy actions, viz., demonetisation and GST (Goods and Sevices tax), disproportionately impacted the informal sector. 
Two important policy implications follow, says the ex-CEA, adding that the entire national income accounts estimation should be revisited, harnessing new opportunities created by the GST to significantly improve it, while restoring growth should be the urgent priority for the new government.
"India must restore the reputational damage suffered to data generation in India across the board -- from GDP to employment to government accounts -- not just by conferring statutory independence on the National Statistical Commission, but also appointing people with stellar technical and personal reputations," the paper said.
"At the same time, the entire methodology and implementation for GDP estimation must be revisited by an independent task force, comprising both national and international experts, with impeccable technical credentials and demonstrable stature. And it must include not just statisticians but also macro-economists and policy practitioners."
Asserting that the overestimation is not political in nature, Dr Subramanian, who was the CEA between 2014 and 2018, said this must be distinguished from recent controversies over a back-casting exercise and 'puzzling upward revisions' for recent years. 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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Iyer Siva

4 days ago

Dr AS should have informed the respective Govt during his times , had he felt it so and if he remained to be thorough professional in his role as CEA. Having missed that role and opportunity to demystify his current stand doesn’t August well either for his role or for the well wishers of the country. Doing autopsy of such economically vital process of determination of GVA / GDP post his exit is something he should not have touched upon, rather it was a role he should have had focused during his tenure. His comments through a seemingly contemptuous prism does not augur well in journalistic or a truly economist’s inquiry with a pragmatic approach on a country’s economy.


Mallikarjun D.V.R.

In Reply to Iyer Siva 4 days ago

He along with his friend Rajan started criticising indian government after leaving the job and the country. Great integrity towards indian public from whom their salary is collected as taxes and paid. They should return the salary earned for being untrue to the public.

RBI Cuts Repo Rate by 25 bps; Changes Stance to Accommodative for Boosting Growth
Home and auto loans are set to become cheaper as the Reserve Bank of India (RBI) on Thursday lowered its key lending rate for commercial banks by 25 basis points (bps) to 5.75%. The central bank also changed its monetary policy stance to accommodate from neutral.
The decision to reduce the repo rate was unanimously taken by the RBI's monetary policy committee (MPC) at its second monetary policy review of the current fiscal.
In a statement, the RBI says, "The MPC notes that growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts. Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate."
As per the monetary policy statement, the main considerations behind the MPC's decision were the decline in private final consumption expenditure (PFCE) and moderation in exports.
At present, high interest rates and liquidity constraints have demoralised auto, home and capital goods buyers. Even the high frequency indicators suggest moderation in activity in the service sector.
Accordingly, a lower repo, or short-term lending rate for commercial banks, will reduce interest cost on automobile and home loans, thereby ushering in growth.
This is the third reduction in repo rate during 2019. The RBI in April lowered its key lending rate by 25 bps to 6%. Before that, in February, the MPC had voted to lower the repo rate by 25 bps to 6.25%.
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