Making India a golden bird

Way back in 1933, on 5 April, US President Franklin D Roosevelt signed one of the most controversial orders in American economic history. The Executive Order No. 6102 criminalised the possession of gold by individuals and corporations and forced every American citizen to surrender all their gold, leave 160 gms, to the Federal Reserve in exchange of a fixed amount of money. Why did the American government do that? That was done because hoarding of gold by communities, corporations and individuals not only decreases the flow of money (given the unproductive capital locked within such hoarded gold) but also to a large extent disturbs the supply-demand equilibrium of gold and bullion.

The importance of and aspiration for gold ownership in India requires no introduction. Despite economic turmoil, the consumer demand for gold is up by 51 per cent in Q2 2013 while the demand for gold bars and coins is up by 116 per cent. As per various unofficial estimates, more than 60,000 tonnes of gold are lying idle in the form of jewellery and ornaments all across the nation. Going by the current price of gold at the rate of Rs 35,000 for 10 grams, this unaccounted reserves could create a possibility of reaping about

Rs 2,10,00,000 crores in money supply. Going by World Gold Council figures, Indians hold 20,000 tonnes of gold (which is an absurdly less figure, as a single temple in South India holds more than 1,000 tonnes of gold); even considering this reduced figure of 20,000 tonnes (which is 33 per cent of the unofficial estimates), the amount we’re talking about would be nothing less than Rs 70,00,000 crores. Against these jaw-dropping numbers, what looks hilariously minuscule is the state of RBI. Despite such huge national deposits of gold, RBI has an official reserve of a mere 550 tonnes of gold, compared to 1,000 tonnes of China (which is again debatable) and 9,000 tonnes of US.

The Government of India should immediately draft and announce a Central Gold Bond scheme, where it should ask people to deposit their gold with the government in lieu of Central Gold bonds at a fixed rate of interest of around nine per cent. One reason I mention this percentage is because in my calculations, I have realised that despite the huge surge in gold price, in the last 65 years the same has increased by only around nine per cent per annum compounded. With respect to the government’s gold bond scheme, people should of course be allowed to take back their gold after say a period of 15 years. The same will be applicable for temples, trusts and other similar institutions; for them, the government could even make it compulsory to deposit all gold and make hoarding beyond a limit illegal. These institutions should be thankful that the government is not nationalising their gold hoardings, given the immense employment generation potential this money can have.

Thus, a huge percentage of gold in physical form would be directed to the Reserve Bank, which, in turn, would utilise the same to increase the money flow and to adjust the exchange rates of our currency.  Similar schemes have been in the past practiced by many European and African nations, with the latest being Venezuela.

This one scheme would serve several purposes. Firstly, it will make the INR stronger, subsequently boosting international trade, especially our mandatory imports; because, with the INR getting weaker, the cost of doing cross-border trade is increasing and the old deals signed at old exchange rates are becoming infeasible to continue. Secondly, it will create huge employment opportunities if the money so sourced is invested honestly in infrastructure or for energy generation/oil production and other such extremely key needs of this country. The money thus minted should only be used for employment generation and entrepreneurship, which eventually would increase jobs in the market and would spirally improve the flow of money further. Thirdly, the entire process of converting physical gold to paper gold would decrease the incidents of gold smuggling and gold hoarding and above all make all gold possession transparent.

Apparently, as of now, it is impossible to even estimate the amount of gold lying inside our nation; and most of these gold hoardings have evaded taxes too; as even today, domestic consumption of gold is not through authorised outlets but through trusted local gold traders. In such cases, tax-evasion is a cake-walk. Such schemes would obviously invite criticism, but when the economy is going through tough times, the political corridors need to take some tough and non-populist steps. The only apprehension that I see here are scams and corruption. Even an iota of embezzlement would create a dynamo effect and ruin the entire economy and social harmony.

In such a situation, the entire execution needs to necessarily be politically independent and under a body such as CAG or Supreme Court with everything being tracked electronically and centrally. The fall of INR to Rs 68.80 per dollar is a matter of utter shame, especially after luxuriously introducing an expensive sign for rupee. After all, as they say, looks can be quite deceptive!
The author is a management guru and director of IIPM Think tank
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