Tapping internal gold
Reports of domestic jewellers meeting part of their gold requirements through sale of stocks held by exchange-traded funds and buyback of old jewellery should be viewed positively for two reasons. One, it suggests that the jewellery trade is actively seeking out alternative sources for gold in the wake of import restrictions. Two, such transactions unlock the value of the sizeable idle gold hoarded by Indian households, which policymakers have been trying to tap for some time now.
Gold imports have dwindled in recent months with successive customs duty hikes and stipulations such as the one requiring importers to earmark at least a fifth of every bullion lot they bring in for re-export. Imports have dropped sharply from 162 tonnes to below 10 tonnes between May and August. Yet, for all this, consumer demand for jewellery in India isn’t going to abate. The need to meet this demand calls for a conscious effort to unlock at least some of the estimated 20,000 tonnes of gold held by households. Creating a liquid market for this gold would offer a structural solution to the problem of high import dependence; in any case, the recent import curbs on gold will have to be eventually lifted. Sporadic attempts by policymakers to encourage households to trade in their idle gold holdings haven’t yielded results. For instance, there are gold deposit schemes run by public sector banks where investors can earn a nominal interest on the value of gold they deposit with a bank and redeem the deposit in cash at the end of a fixed period. The Reserve Bank of India (RBI) has sought to make this scheme more attractive by reducing the minimum term for such deposits from three years to six months. But the 500 gm minimum deposit requirement has been a dampener. Instead, it is ‘cash-for-gold’ schemes that some jewellers have recently introduced on their own that have taken off. Strapped for supply of the yellow metal, they have started swapping gold jewellery for cash — an old practice long abandoned with imports becoming a default option.
The Government and the RBI should encourage the above process of bringing domestic gold hoards into circulation. The gold deposit scheme can be tweaked to reduce the minimum weight norms from 500 grams to, say, 15-20 grams to help banks tap into gold from lakhs of potential retail sellers. Banks, which were quite active in the gold sale business until recently, can also be roped in to make outright purchases of bullion from the public for re-sale to dealers or jewellers, for a fee. Since purity testing requires melting, they could be allowed to buy jewellery as well. All this will help create a more organised two-way market for domestic gold, besides helping the country’s balance of payments. Even if 5 per cent of the 20,000-tonne domestic gold hoard (valued at ` 3 lakh crore at current prices) gets traded through this avenue, it will make a huge difference. Banks can also offer to buy back the bars and coins sold by them in the past, as they come with assaying certificates and carry no purity-related problems.
Source: Hindu business line.