Wednesday, November 13, 2013

The Great Indian Gold Obsession

Yes. We Indians are crazy about Gold. The only other thing that would probably come close to this is the craze for land or real estate. These are in the face, undisputed twin symbols of wealth in India.

Estimates of private Gold holding in India range from 15 to 30 thousand tons (for a comparison, US official holding is approx. 9k tons with Germany a distant second with 3k).  Converted to Dollars, this is a staggering figure that would literally take care of Indian BoP deficits for years. Yet there is relatively little push from GoI/RBI to monetise or unlock this frozen value, even as Rupee's vulnerability is creating a vicious circle of capital outflows, inflation, high interest rates and low growth. A successful Gold deposit scheme is an ideal way out of this conundrum. 

Why do Indians love Gold? And why have the previous gold deposit schemes not been a resounding success? To start with, it is the confidence that Gold will store value better than any financial asset. It is physical and there is a sense of safety. Secondly, over long periods, it performed better than Rupee though the same may not be true in terms of other currencies. So there is an inflation-hedge perception. Thirdly, Gold Jewellery is considered as Sthreedhan, a safety feature for the women and temple Gold is considered as God's. Jewellery is also held for display and not merely store of value. Fourthly, in most cases, Gold can be purchased against cash. Or even where it is not cash, it is not reported. We talk of black money but rarely about black wealth. For whatever reasons, even regular income tax payers ignore paying wealth tax. Forget payment, many an educated tax payer is not aware of the wealth tax regulations. Fifthly, the interest rate offered on the gold deposit schemes so far do not seem to enthuse. Sixth, there is lack of trust and there are fears that once parted, the authorities may confiscate in future or keep extending the scheme. 

Of all these, the black money aspect sticks out. If people want only jewellery, Govt may not be able to monetise the same. But can the private gold held for investment/ black wealth be monetised? I believe that RBI/GoI should make a serious attempt to address some of the above issues. There should be an all out effort on educating the people on wealth tax. A one-time amnesty scheme backed up by a subsequent massive enforcement of IT and wealth tax can potentially do wonders to a well organised deposit scheme. But can the political establishment generate the required will?

The deposit scheme itself should be ideally run by RBI, owing to its better credibility than GoI or SBI. The scheme should guarantee the principal plus interest (a decent rate of say 6%..can it be free of income tax to make it attractive?) in either physical Gold or equivalent Rupee value at the then going rate for Gold. Temples should be persuaded through the Govt trustees on how the interest on Gold deposits can be used for humanitarian purposes. Along with publicity on black wealth, a massive campaign is also required to generate public opinion on how hoarded Gold is an unproductive asset and a colossal national waste. And once a decent amount is collected, this should be used to build up Fx reserves. And long term cycles of Gold price vs international currencies should be used to build back depleted Gold reserves. Such a dynamic approach on forex and Gold reserves along with an attractive deposit scheme can steadily turn the country's fortunes if not overnight. 

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