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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