Not so 'golden'

According to the World Gold Council, India tops the list of 13 countries, followed by China, US, Turkey and Thailand in gold consumption. As per media reports, around 25,000 tonnes of gold is estimated to be in India worth nearly USD 1.5 trillion (Rs 1,07,14,500 crore) based on current prices. The yellow metal, mostly in private possession in the form of jewellery, bars or coins, is revered as infallible security against financial hardships. But the question is whether this valuable resource is really productive, or is it only a dead investment of a good portion of people's hard-earned savings hibernating in a metal.

Until The Great Depression of 1930, the 'Gold Standard', whereby paper currency's value linked to that of gold, used to be the monetary system in the entire world. Today, only less than 10 per cent of currency reserves are invested in gold. 'Fiat money', which is the value of currency not based on physical commodity but allowed to fluctuate dynamically against other currencies, has replaced gold. However, according to WCG, gold accounts for around 12 per cent of the value of total 'reserves' globally, as Central Banks need it as a hedge against inflation in order to moderate the currency fluctuations caused by economic and monetary policies. There is still a huge demand for physical gold bars, coins, gold-backed ETFs (Exchange Traded Funds) and over-the-counter investments in the financial markets.

The gems and jewellery industry is rough of a size of Rs 6.5 trillion and contributes around seven per cent to the GDP and around 16 per cent to India's total merchandise exports. But it's hasty to celebrate before understanding the negative impact of the 'gold love' on the economy. Firstly, with domestic production of gold only at 1 per cent, and recycling at 10 per cent, the remaining 89 per cent of the demand is met by imports, the second-largest after crude oil, often leading to Current Account Deficiency (CAD). Gold imports have increased multifold (22.58 per cent) to USD 7.9 billion (Rs 58,573 Cr) during the April-June 2021 quarter from USD 688 million (Rs 5,208 Cr) of the same period last year pushing the trade deficit to USD 31 billion. It is simple economics that the more the imports, the greater will be the current account deficiency as dollars will flow out of the country weakening the Rupee, a scenario that doesn't augur well for the health of the economy in the long run. Hike in tax or duty to discourage gold imports has only encouraged smuggling, as one-fourth of the total volume of gold entering India is through illicit trade, a vehicle for black money.

Secondly, more than 80 per cent of demand for gold is from households, mostly jewellery, driven by cultural values and investment concerns, but sadly the investment is unproductive and the opportunity cost is ignored. Even if half of the gold available in the country is monetised, it would not only help the growth and development of the economy but also will ensure better returns for people's investment.

Gold is believed to have store value, deliver risk-adjusted returns over multiple time zones, be effective as a diversifier, work as a hedge against inflation and offset a decline in stock markets. These arguments, influenced more by market fears, cannot disprove the fact that the gains in gold investment are far inferior to those in other forms like stock, real estate etc. Actually, the important reason for preferring gold to other forms of investment appears to be the waning of trust in financial institutions, stock markets and real estate in the last two decades. The global meltdown of 2008 and many 'pump and dump' scams in stock markets affected not only sentiment but also fundamentals. People found gold as a safe and secure investment as institutions suffered from credibility crises.

Gold needs to be discouraged as a vehicle for investment. In the larger interest of the economy, we have a three-fold task to perform: first, monetize the gold lying idle in private possessions, second, encourage non-gold alternative investments and, third, restore the credibility of institutions. With regard to the first, few schemes were rolled out in 2015. Sovereign Gold Bonds are debt funds as an alternative to gold. These are government securities with 2.75 per cent interest which can be redeemed in cash at the market price of gold. However, since the bonds are not secured by physical gold, and their price is at a high premium vis-à-vis the market price, the scheme couldn't deliver expected results. The Gold Monetization Scheme is a modification of the Gold Deposit Scheme, 1999 for mobilizing physical gold from people's possession to banks for interest payable at 2.25-2.50 per cent. But the hitch is that since a large part of gold is not officially accounted for, people apprehend a potential risk of harassment from the Income Tax Department. The other disincentives include 8 years locking period and taxability of interest gains. Perhaps revisiting the schemes is necessary in order to make them more investor-friendly with tax relief and voluntary disclosure provisions.

The second and third tasks are interlinked and depend mainly on the banking sector in terms of professionalism and expansion in order to restore the confidence of investors in non-gold products. Even NITI Aayog in its report (2018) on the gold market, emphasised greater participation by banks in the GMS and GML. There is no dearth of alternative investment schemes. Gold saving account powers digital gold with returns in the value of the metal rather than that of currency. Several diversified portfolios promising 10-15 per cent return and flexible exit options are available in the financial market. But the problem is they are in the reach of only a section of educated people and haven't reached out to the vast majority of people. Inadequate financial inclusion is the main cause for which the banking sector is largely responsible. It is difficult to ensure fiscal empowerment of people when out of around 6,50,000 villages only around 36,000 have a bank branch. Bureaucratization crept in operations, compromising professionalism, that even to open an account or to invest in a product, a simple villager must fill in and sign on half a dozen pages of application form and submit unquestionable KYC proofs. The banking sector is going through a credibility crisis for quite some time due to the piling up of enormous amounts of NPAs, and financial scams. Reforms are long overdue to improve matters. Enhanced spending in the social sector, in the long run, especially on education, can help in bringing attitudinal changes on investment in rural India. Similarly, effective control is also necessary for the informal credit sector where gold is the most common asset of a mortgage.

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal