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Gold Monetisation – Are we there yet?

By: Nirupama Soundararajan, Senior Fellow, Pahle India Foundation and Arindam Goswami, Associate Fellow, Pahle India Foundation


There are few countries that are as entranced by gold as India. China recently overtook India as the largest consumer of gold. Turkey, like India, has been a gold consuming country with great success in monetising gold. In India, the introduction of the three gold monetisation schemes was the first step towards gold monetisation and certainly a good beginning. Nearly two years hence, the schemes have not done sufficiently well to call them a success. There are many reasons for this, the lack of standardisation or the lack of infrastructure, but the most conspicuous policy vacuum is the lack of a gold policy in India.

India needs a comprehensive gold policy; one that addresses two fundamental objectives. First, a policy that fosters an environment in which monetisation of existing stocks of gold and securitisation of subsequent purchases of gold is possible. Second, a proactive policy that is oriented towards a vision in which India plays a dominant role in the global gold economy. While every regulator and ministry in India that has little or lot to do with gold have their policies in place, the challenge for the incumbent government will be to pool these dissociated policies together to create an all-encompassing, unsectarian policy.

An archetypal gold policy for India should begin by defining gold. It is indeed ironic that India has never quite defined gold in any of her laws or legislations. It is often clubbed with commodities. In reality, gold can exist as a physical commodity, a financial commodity, a security, or a currency. In India, gold exists in all these forms, though it is legislatively recognised only as a physical commodity. A clear definition of gold will not only be a good beginning to a gold policy, but will also help clear the majority of regulatory arbitrages and overlaps that currently exist. The definition of gold can easily include a standardised measure of quality and quantity for form that gold can take. Hence the next important aspect for gold is standardisation of quality.

The world has the London Bullion Market Association (LBMA) standards that it follows for gold refining and the associated London Good Delivery Standard for assured quality of gold. India, on the other hand, has never really attempted quality control on the gold (or gold jewellery) that is transacted in the country. The fallout of this lack of quality assurance on the gold in India has been rampant smuggling and a complete lack of trust. By extension, securitisation of gold has never taken place (except upon the backing of imported LBMA gold) because financial companies believe that the underlying may not truly reflect the financial value of the security, because in India, one never knows! In order to control the output and import quality of gold, the policy must consider two aspects. One, to only allow LBMA gold to be imported into the country. Two, a suitable refinery accreditation standard must be developed along the lines of LBMA. Refinery accreditation must be made mandatory for all Indian refineries. Thee bigger refineries must be incentivised to eventually get their LBMA accreditation.

The definition of gold and the standardisation of gold when enshrined in the gold policy, will provide a fresh impetus to gold monetisation. For one thing, banks and financial institutions will be a lot more willing to participate in the process of monetisation, which thus far they have been reluctant to do. Apart from the ambiguity on the quality of gold, the other reason why financial institutions, mainly banks, have been hanging back is because the lack of suitable infrastructure has rendered the cost of participation in monetisation non profitable for most. All banks were happy to sell gold coins, but only few were interested to import gold and even fewer in dispensing the gold metal loan (GML). Banks stayed away from the business of gold either because they found it non profitable or because they said they did not have the expertise. Less than a decade ago, India saw the sudden uptake of retail gold loans. It was not the banks that contributed to this growth, but many new gold focussed non-banking financial companies (NBFCs) that capitalised on latent demand. So stupendous was the growth of these gold loan NBFCs that RBI had to set up the famous KUB Rao Committee, with its initial mandate to study the growth of these NBFCs. Soon, banks caught on and caught up with these NBFCs by offering gold loans themselves. But even now, only a few banks have truly been able to excel in this business. The business of gold is obviously not for everyone. The next aspect that the gold policy must consider is the nurturing of gold (bullion) banks. Internationally bullion banks are regular banks which have a strong and prosperous bullion arm. Infact most of these banks have their presence in India. Bullion banks, as differentiated banks (much like payment banks) will provide an opportunity for not just certain banks but also for many NBFCs, financial institutions and other institutions in the business of gold to capitalise on their gold acumen.

Similarly, transparency in transactions must also be addressed in the policy by way of facilitating gold exchanges. In India we have gold future contracts. However, in the interest of transparency, price discovery and securitisation of future purchases of gold, newer products must be allowed to evolve in the market. In most advanced gold exchanges, the most popular product is that of gold leasing. A gold spot exchange on which all transactions above a certain volume/value is recorded will initiate one into the ecosystem of the exchange; transacting on it is a short step from there.

As one of the fastest growing economies, as the second largest (first for the longest time) consumer of gold, as a strong Asian economy, India should have been a prominent participant in the global gold market. Yet, India is only a price taker for gold. We do not influence the price of gold. Infact, we are not even part of the international price setting process. China is. The reason why China is, is because they have a bank that conducts a lot of business in gold which has not been inducted into the elite coterie of banks that fix the global price of gold. The creation of a bullion bank in India may help us gain inroads into the global bullion market. Notwithstanding our success on the on the former, India must also work towards creating our own price fix.

India has never thought about creating a place or a mark for ourselves in the global gold market because we have been happy to follow the world.But India has come a long way from where we were two decades ago. Gold is an asset that India has that we have never capitalised on. Infact, it has never really been viewed as an asset, only as a dead asset and a heavy cost on our current account deficit. This needs to change. India has been an emerging economy for long, it is now time to emerge fully and gold can be that asset that will push us over the curve of emerging into the group of developed economies.


Disclaimer: Views are personal and not the views of the publisher.