India is the largest gold consumer in the world and has huge above-the-ground stocks owned by individual households and temple trusts. But successive governments have never seriously looked at the role of gold as an asset class, neither were they keen to have a formal policy for the yellow metal till now. The government sprung into action when gold imports started widening the current account deficit. They came up with a slew of measures to curb imports. However, demand remained stable. As for the majority of Indians, especially in rural markets, gold is still the primary asset. When demand was not catered by official imports, grey market started flourishing. It was in this context that the government started thinking seriously on means to satisfy the gold appetite of the investors without hurting the trade balance. While some announcements have happened in the past, government is now coming up with a comprehensive policy that can address several issues in the gold market. World Gold Council (WGC) – the global market development organisation for the yellow metal – has a thorough knowledge on plugging gaps.
WGC managing director for India Somasundaram PR in an interview with Sangeetha G explains the real need for a framework to enable gold play a more dynamic economic role as an asset class. Edited excerpts:
The country is in the process of framing a gold policy. What are the key points, you think, will be part of this policy? How will the policy benefit the industry as well as the customers?
Earlier this month, the finance minister announced that the government will announce a comprehensive gold policy to treat gold as an asset class. We think the policy will look beyond the singular focus on import controls that we have witnessed so far and emphasize on the role of gold in value addition and employment generation. It should address initiatives on standards, infrastructure, mainstreaming gold and ‘Make in India’. The announcement also talked about establishing gold spot exchanges to create an efficient trading system and a revamped gold monetisation scheme to ease gold deposits accounts with banks. We expect a stable policy environment to address the needs of the government, the industry and the consumers enabling gold to play a more dynamic economic role as an asset class.
In your opinion, why did the Gold Monetisation Scheme (GMS) not work out as it should have been? What all changes should be brought in to make this scheme work? How is the situation different in markets like Turkey, where it has worked well?
The GMS requires some changes to ease the manner in which a customer can open a gold deposit account. The incentive for customers and banks needs to be enhanced, the number of collection centres need to be larger by including jewellers coupled with a massive consumer awareness campaign. The campaign should in particular, address the tax related concerns of consumers about their legacy gold. We believe these will be addressed in the revamped scheme. However, the expectations from any such initiative should be realistic till awareness grows over years.
Turkey’s monetisation scheme rested on a support infrastructure of refineries and Istanbul gold exchange, tax amnesty for depositors of gold, active participation by large banks and appropriate incentives to both the depositor and the bank. Banks were given some benefit under the reserve option mechanism (equivalent to CRR) and that made the scheme attractive. In India, RBI has already stated that this would not be advisable. Therefore, other forms of incentive to banks need to be examined.
The government had recently made some changes to the gold bond scheme. Has the consumer appetite been better post the changes and what more should be done to make it a major investment product?
The Sovereign Gold Bond (SGB) is not backed by gold and therefore, there will be limited appetite from an average gold buyer. SGB could potentially also be diluting the attractiveness of gold ETFs for investors. We recommend that gold backed investment products such as gold accumulation plan and gold-backed insurance products could be superior alternatives to SGB.
The minister has also mentioned that there would be some proposal on gold mining front in the policy. As a global agency of gold miners, will WGC play any role in facilitating mining activities in India?
As the global market development organisation for gold, we will be supportive of all policy initiatives for the development of the gold industry in India.
WGC has predicted gold demand to be around 850 to 950 tonnes by 2020. What all factors impact this prediction?
The average annual gold demand in India for the last five years has been around 850 tonnes. Broader economic measures addressing transparency and tax compliance, though not limited to this industry, disrupted the gold industry and impacted demand, which fell by 20 per cent in 2016 with marginal recovery in 2017.
The transition to GST and other reform measures however, appear to be proceeding on expected lines and the industry is well on its way to grow in an organised manner in the next two years. The thrust to rural income and the focus on doubling farm income by 2022 in the fiscal budget is very positive for gold. Our econometric studies reveal that demand is influenced by income growth, more than price or monsoon. A one per cent increase in income leads to a one per cent increase in demand, whereas a one per cent increase in price leads to a drop of just 0.5 per cent demand. In addition, global risks of rising inflation and interest rates have raised the attractiveness of gold among asset classes. We therefore, believe that factors are favourable for the demand to return to a normal range of 850-950 tonnes by 2020.
Will yearly phenomena like monsoons, gold price level, government regulations, equity market performance etc. affect the demand?
They do but as I explained, it is the income that acts as a major factor in influencing gold demand in the long term. Some of these factors you have mentioned could create short-term interruptions but the economic and social factors underpinning gold demand in India cannot be wished away. We have seen in the past that demand curbs through 80:20 rule or higher duties create unintended consequences such as grey market.