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A Golden promise is broken
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By
R.N.Bhaskar
---------------------------------------------------------------------------------------------------------------------------------------------------- Indians spend
over Rs.45,000 year after year purchasing gold. All this
money is locked up in an unproductive investment that remains locked
up. . . . .
The Finance Minister promised to introduce Gold Bonds last year.
That
promise remains unfulfilled. The only
beneficiary from the non-introduction is the gold trade which profits
from the difference in the international price of gold and the domestic
price. It also benefits from cheating on the quality of gold used
in
making ornaments. The price
of gold continues to soar. And Indians,
with their immense faith and fascination for this yellow metal, managed
to
import around 650 tones of this metal last year. Of
course, gross imports were around 800 tonnes, but adjusting
for around 150 tonnes that got exported, the net import of gold into
India
stood at around 650 tonnes at the very minimum. Just imagine if these funds could have been used for infrastructure development! Or poverty alleviation. Or…… the alternate uses are mind boggling. And this is where the Finance Minister (FM) has remained silent over his promise of last year. He had then recommended the introduction of Gold Bonds (the technical term was Gold Exchange Traded Funds). To date, there has been no word on this. Not from the RBI. Nor from SEBI. And not even from the FM. The buck keeps getting passed on. And over Rs.46,000 crore is additionally deployed year after year into assets that remain largely unproductive. The biggest benefit investors in gold get is that it is highly fungible. It can be converted into cash anytime, anywhere in the world. And, sometimes, gold offers the benefit of capital appreciation as well. But just imagine, if the same metal could be deposited with a bank guaranteed by the government and gold investors could also get a 2% interest on it. The government could then use it as collateral for forex borrowings thus bringing down the rate of interest even further, as the loans would now be backed by a collateral superior to any credit rating. That is why gold bonds make sense. They would give many people who love investing in gold to own gold bonds, backed by actual gold deposits. They would allow these funds to be used productively. They would boost capital formation and productivity, and reduce the interest burden for the government. Gold investors would continue to benefit from capital appreciation, and the guarantee that they could get back the weight equivalent of the yellow metal any time. More important, it would cease to be an unproductive investment – it could also earn interest. Then why hasn’t the government done this? One obvious culprit is the gold trade, which would see the difference between the international price of gold and the domestic price of gold plummet further. The trade could also see the drift of customers away from ornaments to gold biscuits, where they would not have to lose some of their money towards “making charges” that goldsmiths charge for ornaments. And they would not have to suffer from the cheating that is rampant where they are given inferior quality gold compared to the purity claimed in the bill. Time and again, raids on gold jewellers have confirmed that many jewellers palm off gold jewellery of less than 14 carat purity even when the bills claim that they have a purity of 20 carats or more. Just imagine the benefit the legitimate gold trade could get, if the Gold Bank were to allow Indians to purchase gold bonds in lieu of gold. The bank could, in turn, offer the same gold to Indian exporters of jewellery who need to import gold. Gold would then be available on demand by the trade at international prices without having to reckon with the time delays and freight and insurance costs that import of gold involves. Gold as a raw material for finished jewellery would become cheaper. Legitimate trade in gold would benefit in many ways. Common people who love holding on to the yellow metal would have both the security of gold, and the benefit of interest earned on such investments. And the government would see a part of Rs.45,000 crore of additional funds becoming available for productive purposes at very low rates of interest year after year. And Mr. Chidambaram would then not have to tax education or fringe benefits. |
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