Gold investors are well aware of the restrictions India imposed on its gold market, like increasing import duties. In this post I want to step back and have a look at what India has done, and more importantly, what policy options it may still have up its sleeve.
Our starting point is the Reserve Bank of India's January 2013 Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs. Within its 224 pages are the following recommendations (direct quotes):
- further hike in the import duties may have to be contemplated to dissuade gold imports
- restrictions on carrying of gold and gold jewellery by incoming Indian community from abroad ... may also have to be reviewed to ensure that bringing gold into the country less attractive option
- entities importing bulk gold through banking and non-banking channels can be asked to an export obligation based on a certain percentage of imports of the gold
- bank finance to purchase gold may be prohibited
- Modified Gold Deposit Scheme (gold taken as a deposit is recycled for meeting domestic demand and given back at the time of maturity)
The above points have now been implemented, below are those which have not yet been implemented.
- Inflation Indexed Bonds ... introduce savings schemes and instruments that can provide real returns with high liquidity
- Gold Accumulation Plan (the product is a saving plan catered to even small buyers of gold in which the gold imports are deferred till the time of actual delivery of gold)
- Gold Linked Account (the entire transaction takes place outside India and import of gold is not involved)
- Gold Pension Product (the customer surrenders gold to the bank on agreement to receive streams of monthly pension till his death)
- Setting value or quantum limits for canalising agencies and banks to import gold
- trying to channel the existing supplies of scrap gold in the country into the financial system
- Gold Bonds and Gold Deposits Schemes that may encourage gold holders to deposit their idle gold holdings with banks
- expanding financial inclusion in extending gold jewellery loan
In respect of all the various paper gold type products, it is worth noting this story which reports that the Indian central bank had "sent letters to some of the country's richest temples asking for details of their gold". The head of an opposition party "said the RBI wanted to 'take possession' of the gold and maybe sell it for dollars" but the central bank said there was "no proposal under its consideration to convert idle gold into bullion at this juncture".
The general rule, of course, that politicians first deny what they later introduce, just as the Finance Minister said on January 30 that there were "no plans for additional taxes or curbs on gold imports".
Furthermore, a Reserve Bank of India regional deputy general manager was quoted as saying that there interest extended beyond temples" “We sought the details as part of a statistical exercise to gather details of the gold in the possession of all places of worship and other public bodies. We started the process with temples. We had planned to cover the places of worship of other communities, trusts and establishment in subsequent phases".
Some temples do already deposit gold with Indian banks, earning interest of around a few percent. Below are the amounts held by three temples I've picked up from various reports:
Tirumala Tirupati Devasthanam - 116,643oz / 3.6t
Tirupati - 72,339oz / 2.25t
Sri Krishna - 16,075oz / 0.5t
So there is a fair amount of gold just held across many temples, let alone private individuals. The reported objective of these gold schemes is to lend the gold to the extensive Indian jewellery industry, which hold significant amounts of gold as work in progress stock. This I don't see as a problem, because the gold is not being sold and stays within the country. It also helps to consolidate gold as money.
However, utilising investor stocks of gold this way does not really solve India's import problem, as all it is doing is replacing gold loans given to importers and jewellers from overseas bullion banks with internally funded sources. This only provides a one off benefit as the gold flows out of India only as the bullion bank loans are repaid. Thereafter India still needs to import gold on an ongoing basis.
This leads to the key, in my mind, recommendation from the report, which was the "setting up of Gold Corporation or Gold Bank in India". The purpose of this entity is to (direct quotes, my emphasis):
- provide refinance to institutions lending against the collateral of gold
- retailing functions in gold including pooling of idle gold in the system
- be empowered with wide-ranging activities related to the entire spectrum of gold policies
- make official purchases and sales of gold
- may issue gold bonds and collect the gold stocks
- be to mobilising domestic non-official gold holdings; channelise them into a centralised pool over a period of time and to deploy them in a productive manner in the best interests of growth and development of the country
- be authorized to buy and sell gold on their behalf and on behalf of their clients
- be empowered to handle the country's gold reserves
- be given powers to import, export, trade, lend and borrow gold and deal in gold derivatives
One could argue that if you plan to "mobilise" (cough cough) domestic gold holdings, then you first need to know where and how much gold is held in places of worship, trusts and establishments. Then you can utilise this gold to implement the "entire spectrum of gold policies". Lets just hope India's CAD improves, otherwise the Reserve Bank of India may feel it needs to implement more of the report's recommendations.