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Shri.Palaniappan Chidambaram Date: 15-01-2013
Government of India
Ministry of Finance
Room No.134, North Block
New Delhi 110001
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Ø 40% of the world’s annual gold production is consumed by India and China alone.
Ø Over the whole of the last financial year, India imported $60 billion worth of gold or 1067 tonnes, which forms the major chunk of the current account deficit.
Ø In October 2012, the current account deficit jumped to a 12-year high of $ 21 billion thanks to an unprecedented rise in the imports of two of the hottest commodities: gold and crude oil.
Ø Net gold imports constitute for 1.8 - 2.4 per cent of India’s gross domestic product.
Ø The global output of has been around 4,000 tonne per year. But India’s domestic consumption of gold has more than doubled to 1,000 tonne annually since 1999.
Ø An estimated 25,000 tonnes of bullion is held by Indians. While that is an impressive stock of wealth, it is unproductive and earns no interest. It has, however, been an excellent hedge against inflation.
India does not have many gold mines and majority of its consumption is through imports. No doubt this has put a huge stress on the economy. And presently, the rising value of the dollar is only being a nail on the coffin. Also, sophisticated investors have opted for exchange-traded funds, or ETFs, rather than physical metal, leading to a 300 per cent rise in assets under management by gold ETFs since September 2010. In terms of quantity, imports may drop to 800 tonnes this fiscal year. However, rising prices, both of the metal and of the dollar, will ensure that this will still exert substantial pressure on the balance of payments.
Thus it can be clearly seen that tones and tones of gold is lying in the Indian economy which is practically unproductive and are dead assets. Yet the herd mentality of the consumers has only worsened the scenario and has only pushed up the prices of gold without justification.
Fundamentally today, gold is not being used by consumers for its true purpose but rather is being seen as an instrument to hedge inflation or as a safer security option in which their income can be invested upon. Due to this fundamental problem, the prices of gold, though determined by the market forces, is not truly reflective of its intrinsic value. Reforms have to be brought in not just to stabilize the prices of gold or to curb the import bill or current account deficit, but rather to change this fundamental attitude of the common man and to show gold its true place in the international market and thereby to the Indian household. This can be solely done by bringing the so called dead assets or rather the value of the dead assets in the mainstream economy. In the course of the implementation of such reforms, the value of the yellow metal is bound to correct and the import bill would decline.
In this regard, a very interesting concept through creative financial engineering has been thought over to unlock the store of the 25000 tonnes of gold. It would involve very simple set of reforms or law making.
Firstly, the government of India should introduce a scheme wherein any Indian or Indian entity can place their gold with the government for a stipulated period which should not be less than 10 years and he/she would get 70% of its value as interest-free loan for that period. The valuation of this gold should obviously be done on the basis on which the present gold loans are being offered. At the end of that period, if the person offering the gold intends to take physical delivery back of the gold that he/she had offerred, he/she should be given such an option provided they return the principle amount of the interest free loan. Also, this scheme should take the form of a voluntary disclosure scheme for disclosure of gold assets. It would basically mean that no questions other than the PAN number and the Aadhar card number or Aadhar registration number should be asked. This would serve multiple purposes. It’ll bring out the gold reserves that people have hoarded upon through black money in the mainstream economy and also create a database of such individuals who have such increased quantities of gold with them without justification as it would be an indicator of their wealth and assets accumulated through fishy means.
Certainly there would be questions as to why such a scheme would be successful. The answer to this is that, this scheme would be a getaway for black marketers and hoarders of gold and other assets to monetize their holdings, albeit the reduced value they would receive, as this monetization would ensue that the money they receive in lieu would be white money. Also it would be a safer option for genuine holders of gold who are in need of money or who want to securitize their assets as the money they would receive would be interest free over a period of 10 years or more. This scheme also ensures that the aged and the aging among the Indian population who are struggling to meet the two ends for survival would opt for it rather than keeping it in closets, in vaults after paying vault rentals and also spending sleepless nights. In many cases, this has also been a major social friction amongst generations to get hold of this asset. The money raised as loan could be re-invested by the recipient either through schemes for monthly income for their upkeep and maintenance or for social and/or economic upgradation which otherwise takes place through the practice of gold loans which are anyway costlier and less remunerative as compared to this scheme. It is not out of place to mention here that the present youth is fast losing their gravity towards gold as an attractive asset as they are more consumerist oriented and are a spending lot. It is this growing change in attitude which the government can encash upon so that at the end of the decade of this scheme, gold as an investment would have undergone a paradigm shift in the value system of the Indian society. Since these loans are to be disbursed strictly through banks as transfers to the beneficiaries’ account and these are further invested or consumed by the recipients this would fuel economic activity resulting in higher consumption and investment.
Furthermore, there would be justification needed as to why the government should offer interest free loans for a period spanning over 10 years and that to for 70% of the value. Once such a scheme is introduced, there can be a substantial presumption that many holders of gold, whether genuine or through black money, would want to monetize their assets whether to convert it to white money as a part of the voluntary disclosure scheme or for genuine purpose of raising a loan. If this happens, over a period of time, the value of the yellow metal will stabilize and will gradually correct as the supply of gold would increase as compared to the demand. The question arises as to what the government can meaningfully do with the gold so collected. The government of India should apply this asset that it acquires for multiple purposes. First of all this stalk can be used for increasing the stock of rupee i.e. money, by printing currency to cater to the enhanced demand. This, people may argue, may fuel inflation. Infact it could be the other way round. The rush for gold monetization would reverse the psyche towards this metal and the prices would drop which in anyway is waiting for an opportunity to get towards the downward spiral. This trend of gold would reverse the trend of the rupee vis-à-vis the dollar as value imports would decrease thereby making it strong and positively helping the trade account. Plus, in these 10 years, the same stalk of gold can be used for supply to genuine jewelry usage to both domestic and export market. There is also a possibility that the Indian economy could turn out to be a temporary exporter of this metal. This is bound to have a telling effect on the international prices of gold as India would be seen as a less active participant in the international gold import market. The resulting appreciation in the value of rupee will have a far reaching impact on the import bill including that of petroleum imports. This would have a cascading effect on reducing the inflation. All this put together is bound to have an enormous positive psyche in the economy and give a boost to the economic growth and activity. As in the case of the GST, this economic reversal towards the positive trajectory is bound to contribute atleast 2-3% in the increase in GDP if not more. It may appear to be a magic wand, but strangely it is actually so.
As for the return of gold to the offerers at the end of 10 years, since the situation as it stands today, it is likely that many of them may not turn up to take delivery of the yellow metal after 10 years. The reasons being the attitude of the younger Indian generation today, the present attitude of pledging gold for loans and not being able to recover it and the fact that the aging and the aged would be offering it for their upkeep and maintenance resulting in the next generation of theirs who are very much unlikely to come up to claim the gold after repaying the loan taken by their predecessors and that too at a time when the metal itself had undergone a deep correction at the end of 10 years. This would ensure that not more than 10% would turn up to collect the gold and 10 year is a pretty long time for the government to be ready with this stalk of gold and that too at a lower price than what it had taken it which is only 70% of its actual value when the transaction took place. The fact that the offerer has the option of taking physical possession of the metal at the end of 10 years is in itself an incentive for the people to offer the metal for monetizing since in this process they are allowed to have the cake and eat it too. Hence this transaction is bound to be a sure shot success.
The loan received by the aging and aged would be but obviously invested by them in high yield investments to make up for the inflation pressure faced by them in their day to day living. And the consumerist section of the society would use the funds for purchase of assets, durables, and non-durables etc all of which are positive economic activities. Presently these positive economic activities are pursued by pledging the gold to gold financing companies and banks wherein the borrower ends up receiving the short end of the stick.
Also, the positive impact of the rupee value on our current account situation will also ensure that the government need not promote exports solely with a view to foot the ever increasing import bill as it is done today by offering export incentives which in turn will end up as savings for the government in the light of this scheme being successful.
Simultaneously the government can also issue 10year 6% tax free bonds simultaneously so that a part of the monetized amount could flow into this. These could be like the benchmark 10 year bonds having similar features of SLR and fiduciary compliant compatibility for financial institutions and banks. This would ensure that over a period of time the governments’ effective borrowing rate would come down from 8% to 6% thereby saving trillions of rupees towards interest cost.
The icing on the cake which the entire scheme provides is the vast data which would be available with the government as regards the wealth, the wealthy and their whereabouts how so official, unofficial, significant or anonymous they may be. The PAN number data and the UID data ensures that this task is achieved. This database can be used for widening of tax nets by the government especially in cases where presently the entities may be disclosing income and its exemption from tax in the guise of being agricultural income and thereby amassing wealth through gold. The monetization of the gold wealth will in turn make them eligible for tax payment through the income received by them out of the monetized proceeds and hence the net can be cast on them. Finally for the skeptics, the justification for this could be that gold as wealth in the Indian society need not and is not necessarily and always be through illegitimate means. In many cases it has been inherited through generations and in legitimate fashion. The stalk has grown over ages in the hands of the individuals and it is actually the present value and the inactivity which is the culprit. So the scheme can be justified as one to activate this stalk though it may also benefit illegitimate owners but so are the other schemes. Finally the engine of growth which this scheme can provide through the monetization of this wealth by fuelling economic development and GDP expansion through penetration of its reach to all sections of society is in itself a good enough reason for the scheme to be put in its place. As for the methodology of its operation and its implementation and the fine tuning thereof, it is better we leave it to the experts in the field of finance and merchant banking. Finally, this will be an excellent opportunity for the government to cleanse the Indian economy and the society of its dead weight of its golden treasure.
Eagerly awaiting your feedback and response