At a panel discussion - the first of its kind on Gold and its status in India - at IIMB, RBI Deputy Governor K C Chakrabarty calls for "gold intoxication" to end
Indian Institute of Management Bangalore (IIMB) hosted a panel meet on 'Gold and India' on January 24, 2014 from 2:30 pm to 4 pm. Panelists, besides Dr Charan Singh, RBI Chair Professor, IIM Bangalore included Dr K C Chakrabarty, Deputy Governor, RBI; Mr. P R Somasundaram, World Gold Council; Mr. Rajesh Khosla, MD, MMTC-Pamp; Mr. Bhaskar Bhat, MD, Tanishq; and Mr. Vivek Kaul, author of the book 'Easy Money'..
The panel analyzed how gold can be mobilized and monetized for the benefit of the Indian economy.
Professor Charan Singh, initiated the discussion and observed that Indians have a strong demand for the noble metal, gold for various reasons, traditional, and financial. The high value of gold imports, add to the import bills and contribute to widening of the trade deficit. During the past few months, in order to handle the problem of Current Account Deficit (CAD), to curb gold imports, the authorities raised the import duty on gold in stages during the year, raising it up to 10 per cent in August 2013. Large demand, miniscule internal supply and now hiked up charges to import the metal seem to have paved the way for potential unofficial routes of bringing gold into the country, according to anecdotal evidence.
Allowing the domestic currency to depreciate and be at an equilibrium level determined by the market forces may itself act as a natural deterrent to the demand for gold. Emphasis and focused approach would be required to look at the bigger picture, go down to the root causes of the issues, and strengthen the fundamentals of the economy. Probably, such strict measures may not be useful. As majority of the gold buyers belong to the rural regions of the country, indicating the spending capacity of the rural people. This is a case of availability of ample money for deployment, but absence of appropriate channels to invest the money. The government and the authorities should look into these possibilities on priority. If the idea of a substitute financial instrument instead of gold floats well, it would be a win-win situation for the investors as well as the economy and the nation.
Gold gets dug out of the ground in Africa. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head!" With this quote by Warren Buffet, Dr K C Chakrabarty, Deputy Governor, Reserve Bank of India (RBI) held forth on 'Gold and its status in India'.
Declaring that 'gold intoxication' is prevalent only to India, he said society as a whole must work together to change mindsets. "Stop giving/taking gold as dowry and stop giving gold to temples," he advised. "Gold was an asset 2000 years back, when India was rich and contributing 30% to world GDP. Our current account deficit is negative and how can we invest in importing gold: India cannot afford it?"
Maintaining that RBI has never stopped import of gold, he said: "Do not borrow money from banks to import gold. Consumer has never benefitted from gold and gold has given a negative return world-wide, it is not an investment but a speculation."
"We believe that gold can be part of the solution to the challenges that India faces today and would like to see discussions about how best efficiency of the market can be enhanced by the standardization of gold," said Mr Amresh Acharya, Director Investment, World Gold Council.
He suggested that policy direction should view gold as a strategic asset for India and its citizens, with the objective to mobilize and monetize the nation's gold stock to support economic growth. Further there lies a strong need to consider the introduction of new gold-backed financial products to unlock the hidden economic value of the gold in the economy. Implementation of recommendations such as the formation of a 'Bullion Corporation of India' and relaxation of regulatory curbs is the need of the hour.
"Gold can play a role in financial inclusion and we should consider schemes of institutional credit against gold as collateral. There are significant holdings of gold at the grass root level which can be brought into the financial system," added Mr Acharya.
Mr. Vivek Kaul, author of 'Easy Money', said: "Gold imports directly contribute to inflation". According to him, higher inflation triggers demand for gold. The purchasing power of money goes down and gold power increases. Describing this as 'Bad Money where the rupee loses driving out Good Money, he said India's insatiable demand for gold has inflated the country's import bill, leading to its chronic current account deficit which has triggered a tumble in the rupee.
Mr. Rajesh Khosla, MD, MMTC-Pamp, India's only state-of-art precious metals refinery set up as a joint venture between MMTC Ltd. (www.mmtclimited.com), a Govt. of India undertaking and PAMP Switzerland (www.pamp.com), explained how the country could achieve an optimum solution, sustain domestic employment, manufacturing and economic growth through refining and also meet the shortfall by importing refined gold as determined and in controlled fashion.
"The 20:80 scheme for bullion import is resulting in considerable collateral damage in the form of artificially promoting gold jewellery exports at the cost of higher domestic premiums for gold. This is also encouraging round tripping of gold jewellery export and its subsequent re-import by paying prescribed customs duty. Gold jewellery import, which is as yet not being monitored, is developing as a means of bridging the supply gap and this is not only putting undue pressure on the CAD but also sustaining the high domestic premium for gold," he argued.
To achieve the twin objective of sustained economic growth through domestic manufacturing and simultaneously addressing the CAD, Mr Khosla suggested the following measures:
- Of the 700t (or whatever quantity deemed appropriate) gold bullion import for year 2014, set aside say 200t for gold doré import, which is regulated by actual user import licensing as existing. This leaves say 500t for import of gold bullion by agencies licensed by RBI / Govt.
- Allocate quarterly import quota for gold import by such agencies and let them bid for the gold on say a quarterly basis.
- Review gold / gold doré import on a quarterly basis to set the agenda for gold import in the subsequent quarter, all within a quantity the CAD can sustain.
- This will also enable the Government to mop up the domestic gold premium, thus adding to its revenue.
The panelists agreed that there is an urgent need to understand the role of gold in the economy. "While formulating measures to mobilize domestic gold, authorities should appreciate that Indians consider gold as an investment not a consumption item. Gold is as an asset for millions of individuals in a multi-dimensional Indian economy and it can play a greater role in lifting up the fiscal situation of the country," concluded Prof. Charan Singh.
At a panel discussion - the first of its kind on Gold and its status in India - at IIMB, RBI Deputy Governor K C Chakrabarty calls for "gold intoxication" to end
Indian Institute of Management Bangalore (IIMB) hosted a panel meet on 'Gold and India' on January 24, 2014 from 2:30 pm to 4 pm. Panelists, besides Dr Charan Singh, RBI Chair Professor, IIM Bangalore included Dr K C Chakrabarty, Deputy Governor, RBI; Mr. P R Somasundaram, World Gold Council; Mr. Rajesh Khosla, MD, MMTC-Pamp; Mr. Bhaskar Bhat, MD, Tanishq; and Mr. Vivek Kaul, author of the book 'Easy Money'..
The panel analyzed how gold can be mobilized and monetized for the benefit of the Indian economy.
Professor Charan Singh, initiated the discussion and observed that Indians have a strong demand for the noble metal, gold for various reasons, traditional, and financial. The high value of gold imports, add to the import bills and contribute to widening of the trade deficit. During the past few months, in order to handle the problem of Current Account Deficit (CAD), to curb gold imports, the authorities raised the import duty on gold in stages during the year, raising it up to 10 per cent in August 2013. Large demand, miniscule internal supply and now hiked up charges to import the metal seem to have paved the way for potential unofficial routes of bringing gold into the country, according to anecdotal evidence.
Allowing the domestic currency to depreciate and be at an equilibrium level determined by the market forces may itself act as a natural deterrent to the demand for gold. Emphasis and focused approach would be required to look at the bigger picture, go down to the root causes of the issues, and strengthen the fundamentals of the economy. Probably, such strict measures may not be useful. As majority of the gold buyers belong to the rural regions of the country, indicating the spending capacity of the rural people. This is a case of availability of ample money for deployment, but absence of appropriate channels to invest the money. The government and the authorities should look into these possibilities on priority. If the idea of a substitute financial instrument instead of gold floats well, it would be a win-win situation for the investors as well as the economy and the nation.
Gold gets dug out of the ground in Africa. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head!" With this quote by Warren Buffet, Dr K C Chakrabarty, Deputy Governor, Reserve Bank of India (RBI) held forth on 'Gold and its status in India'.
Declaring that 'gold intoxication' is prevalent only to India, he said society as a whole must work together to change mindsets. "Stop giving/taking gold as dowry and stop giving gold to temples," he advised. "Gold was an asset 2000 years back, when India was rich and contributing 30% to world GDP. Our current account deficit is negative and how can we invest in importing gold: India cannot afford it?"
Maintaining that RBI has never stopped import of gold, he said: "Do not borrow money from banks to import gold. Consumer has never benefitted from gold and gold has given a negative return world-wide, it is not an investment but a speculation."
"We believe that gold can be part of the solution to the challenges that India faces today and would like to see discussions about how best efficiency of the market can be enhanced by the standardization of gold," said Mr Amresh Acharya, Director Investment, World Gold Council.
He suggested that policy direction should view gold as a strategic asset for India and its citizens, with the objective to mobilize and monetize the nation's gold stock to support economic growth. Further there lies a strong need to consider the introduction of new gold-backed financial products to unlock the hidden economic value of the gold in the economy. Implementation of recommendations such as the formation of a 'Bullion Corporation of India' and relaxation of regulatory curbs is the need of the hour.
"Gold can play a role in financial inclusion and we should consider schemes of institutional credit against gold as collateral. There are significant holdings of gold at the grass root level which can be brought into the financial system," added Mr Acharya.
Mr. Vivek Kaul, author of 'Easy Money', said: "Gold imports directly contribute to inflation". According to him, higher inflation triggers demand for gold. The purchasing power of money goes down and gold power increases. Describing this as 'Bad Money where the rupee loses driving out Good Money, he said India's insatiable demand for gold has inflated the country's import bill, leading to its chronic current account deficit which has triggered a tumble in the rupee.
Mr. Rajesh Khosla, MD, MMTC-Pamp, India's only state-of-art precious metals refinery set up as a joint venture between MMTC Ltd. (www.mmtclimited.com), a Govt. of India undertaking and PAMP Switzerland (www.pamp.com), explained how the country could achieve an optimum solution, sustain domestic employment, manufacturing and economic growth through refining and also meet the shortfall by importing refined gold as determined and in controlled fashion.
"The 20:80 scheme for bullion import is resulting in considerable collateral damage in the form of artificially promoting gold jewellery exports at the cost of higher domestic premiums for gold. This is also encouraging round tripping of gold jewellery export and its subsequent re-import by paying prescribed customs duty. Gold jewellery import, which is as yet not being monitored, is developing as a means of bridging the supply gap and this is not only putting undue pressure on the CAD but also sustaining the high domestic premium for gold," he argued.
To achieve the twin objective of sustained economic growth through domestic manufacturing and simultaneously addressing the CAD, Mr Khosla suggested the following measures:
- Of the 700t (or whatever quantity deemed appropriate) gold bullion import for year 2014, set aside say 200t for gold doré import, which is regulated by actual user import licensing as existing. This leaves say 500t for import of gold bullion by agencies licensed by RBI / Govt.
- Allocate quarterly import quota for gold import by such agencies and let them bid for the gold on say a quarterly basis.
- Review gold / gold doré import on a quarterly basis to set the agenda for gold import in the subsequent quarter, all within a quantity the CAD can sustain.
- This will also enable the Government to mop up the domestic gold premium, thus adding to its revenue.
The panelists agreed that there is an urgent need to understand the role of gold in the economy. "While formulating measures to mobilize domestic gold, authorities should appreciate that Indians consider gold as an investment not a consumption item. Gold is as an asset for millions of individuals in a multi-dimensional Indian economy and it can play a greater role in lifting up the fiscal situation of the country," concluded Prof. Charan Singh.