Solution to release of domestic capital and contain Current Account Deficit
It is obvious that huge accumulation of non-financial and unproductive asset in the form Gold has done more harm than good to the Indian economy, stock roughly estimated at around USD 1 Trillion. The impact is both direct and indirect on the CAD, Rupee exchange rate, inflation, monetary policy and permanent export of domestic capital. The economic value created from this activity (transfer of imported Gold to household jewellery and in the forms of coins/bars into safe deposit lockers) is miniscule compared to the significant damage caused through annual import of USD 50 billion.
The most critical structural woes on the Indian economy revolve around scarce domestic capital leading to higher dependence on external liquidity, import of non-essential goods leading to flight of domestic capital bridged through hot money FPI/repatriable inflows and downside pressure on Rupee exchange rate exerting upward pressure on the inflation and interest rate. The contribution from non-essential Gold imports contribute significantly to these structural woes on the system.
It is not that efforts have not been made to undo these adverse impact. Schemes to this effect are being launched and improvised since 1999, but most have failed for reasons attributed to the products and lack of appetite from the consumers. It is early to come to a conclusion (on the just rolled out schemes) that all will go well from here to reduce the high dependence on imported Gold for domestic consumption, but believe that the impact will be felt marginally in the initial stage before making a long term sustainable beneficial impact. The three schemes under the Gold Monetisation Scheme, 2015 have been rolled out with intent to unearth idle Gold (under Gold Deposit Scheme) for sale to MMTC for conversion into Gold Coins (Sovereign Gold Coins scheme) and sale to domestic wholesale consumers (Gold Metal Loan Scheme) and introduction of sovereign paper Gold asset (Sovereign Gold Bond Scheme) as alternate to physical holding. The coverage is complete, but what matters is the execution efficiency!
Gold Deposit/Metal Loan Scheme: Can it unearth household jewelry?
The product roll-out is with intent to unearth Gold assets lying idle (at household or lockers) in the form of jewellery or coins or biscuits or bars. These idle assets if deposited with nominated Banks will earn interest till maturity and redeemable either in cash or physical Gold. The supply (into Gold Deposit Scheme) will be from holders of household jewellery, investors holding Coins/Biscuits and others who hold bars as alternate to cash for whatever reasons. The demand (for Gold Metal Loan Scheme) will be from wholesale bullion dealers, large jewellery manufacturers and other manufacturers who use Gold as raw material. In the initial stage, significant stock from investors (held in the form of coins/biscuits) will flow into the deposit scheme to earn some interest on the idle asset. The issues revolve around attracting the household jewellery and high value bars held as alternate to cash. Having said this, coverage of even 10% of over all stock is a good beginning covering 2 years of import consumption. Will there be demand from consumers? Will locally refined BIS assayed quality be at par with hallmarked imported bars? The appetite for domestic refined bars as alternate to international quality is to be seen. But, the initial captive demand appetite from MMTC for making Gold Coins and to meet their import from domestic purchases from nominated Banks will be good enough to start with.
Sovereign Gold Coin Scheme: Reduce dependence of imported Gold Coins
The demand for Gold coins are now met through import from reputed foreign refineries. The supply of Sovereign Gold Coins through MMTC made out of bars acquired through Gold Deposit Scheme will cut the import bill of Gold Coins significantly, if not completely. It is not clear how other agents who are authorised to sell Gold coins will react, and the extent of competitive edge MMTC will have over other operators in the Gold Coin product.
Sovereign Gold Bond Scheme: Shift appetite from physical to paper Gold
The scheme is good (and convenient) for the investor community who treat Gold as alternate asset class along with equities, fixed income and opening up exposure on currency. The appetite however at this stage will be muted given the negative "carry" of around 6% against declining Gold prices, marginally compensated for from Rupee value adjustment to USD strength. Of late, Gold has lost its relevance as safe-haven investment to mitigate risks from inflation and extended risk-off mode on equity and fixed income assets. The demand for Gold from the younger generation (as investment product) is on the decline. The demand-supply dynamics is also not in favour of restoration of bull-trend of Gold in the near future. Despite all these risk factors against significant accumulation of capital through this scheme, consumption of imported physical Gold for investment purpose will be reduced.
Execution and extended reach is critical for success
The multi-product roll-out through Gold Monetisation Scheme is well conceived, but execution is very critical to achieve the desired objective. The execution phase involve extensive marketing, reach out to consumers of physical Gold (wholesale and retail) and immediate removal of irritants through constant improvisation. The consumers will look for quality and cost efficiency to be at par to what is available now from international vendors. The earlier scheme of 1999 has passed through 15 years of existence, and learning from this journey should make the 2015 scheme successful. The economic benefit is huge to stay less dependent on foreign capital, turn neutral on Current Account, to cut flight of domestic capital for non essential import consumption and ensure Rupee stability pulling in stable long term sustainable off-shore investments. The job creation from domestic refineries and other stake holders will lead to economic expansion. It is high priority agenda for a smooth journey ahead as India complete 25 years of economic liberalisation.
Moses Harding
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