the golden paradox

7/29/2019 the golden paradox

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THE GOLDEN PARADOX

BY

S.SRINIVASAN

PRESIDENT

NATIONAL UNION OF BANK EMPLOYEES

The fact that Indians, through generations, have loved gold, is well known. But off-late, the

Government of India's attitude to the role what Gold plays in the Indian economy has been

mixed. Gold is being seen in a negative light by policymakers who shake their heads at the

public's obsession with it and the difficulties it creates for economic management. How to force

Indians to disgorge some of the several thousand tonnes they hold in the form of

gold jewellery or ornaments, some of it passed down generations, was a staple of economic

debate for decades. With the dawn of a new calendar year, our finance Minister expressedconcerns about the rising import bill for Gold. Certainly the economic slowdown seen in the past

decade has only fuelled the strengthening of the confidence of the common man in gold. The

finance Minister is currently contemplating making gold more expensive to be imported as thats

the only choice which would be left to curb its import while talking about the worrisome state of

the current account deficit. Equally the government is also worried about resurgence of gold

smuggling if import is curbed.

Time for some statistics :

40% of the worlds annual gold production is consumed by India and China alone.

Over the whole of the last financial year, India imported $60 billion worth of gold or

1067 tonnes, which forms the major chunk of the current account deficit.

In October 2012, the current account deficit jumped to a 12-year high of $ 21 billion

thanks to an unprecedented rise in the imports of two of the hottest commodities: gold

and crude oil.

Net gold imports constitute for 1.8 - 2.4 per cent of Indias gross domestic product.

The global output of has been around 4,000 tonne per year. But Indias domestic

consumption of gold has more than doubled to 1,000 tonne annually since 1999.

An estimated 25,000 tonnes of bullion is held by Indians. While that is an impressive

stock of wealth, it is unproductive and earns no interest. It has, however, been an

excellent hedge against inflation.


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India does not have many gold mines and majority of its consumption is

through imports. No doubt this has put a huge stress on the economy. And

presently, the rising value of the dollar is only being a nail on the coffin. Also,

sophisticated investors have opted for exchange-traded funds, or ETFs,

rather than physical metal, leading to a 300 per cent rise in assets undermanagement by gold ETFs since September 2010. In terms of quantity,

imports may drop to 800 tonnes this fiscal year. However, rising prices, both

of the metal and of the dollar, will ensure that this will still exert substantial

pressure on the balance of payments.

Thus it can be clearly seen that tones and tones of gold is lying in the Indian

economy which is practically unproductive and are dead assets. Yet the herd

mentality of the consumers has only worsened the scenario and has only

pushed up the prices of gold without justification.

Fundamentally today, gold is not being used by consumers for its true

purpose but rather is being seen as an instrument to hedge inflation or as a

safer security option in which their income can be invested upon. Due to this

fundamental problem, the prices of gold, though determined by the market

forces, is not truly reflective of its intrinsic value. Reforms have to be brought

in not just to stabilize the prices of gold or to curb the import bill or current

account deficit, but rather to change this fundamental attitude of the

common man and to show gold its true place in the international market andthereby to the Indian household. This can be solely done by bringing the so

called dead assets or rather the value of the dead assets in the mainstream

economy. In the course of the implementation of such reforms, the value of

the yellow metal is bound to correct and the import bill would decline.

In this regard, a very interesting concept through creative financial

engineering has been thought over to unlock the store of the 25000 tonnes

of gold. It would involve very simple set of reforms or law making.

Firstly, the government of India should introduce a scheme wherein anyIndian or Indian entity can place their gold with the government for a


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stipulated period which should not be less than 10 years and he/she would

get 70% of its value as interest-free loan for that period. The valuation of this

gold should obviously be done on the basis on which the present gold loans

are being offered. At the end of that period, if the person offering the gold

intends to take physical delivery back of the gold that he/she had offerred,he/she should be given such an option provided they return the principle

amount of the interest free loan. Also, this scheme should take the form of a

voluntary disclosure scheme for disclosure of gold assets. It would basically

mean that no questions other than the PAN number and the Aadhar card

number or Aadhar registration number should be asked. This would serve

multiple purposes. Itll bring out the gold reserves that people have hoarded

upon through black money in the mainstream economy and also create a

database of such individuals who have such increased quantities of gold with

them without justification as it would be an indicator of their wealth andassets accumulated through fishy means.

Certainly there would be questions as to why such a scheme would be

successful. The answer to this is that, this scheme would be a getaway for

black marketers and hoarders of gold and other assets to monetize their

holdings, albeit the reduced value they would receive, as this monetization

would ensue that the money they receive in lieu would be white money. Also

it would be a safer option for genuine holders of gold who are in need of

money or who want to securitize their assets as the money they would

receive would be interest free over a period of 10 years or more. This

scheme also ensures that the aged and the aging among the Indian

population who are struggling to meet the two ends for survival would opt for

it rather than keeping it in closets, in vaults after paying vault rentals and

also spending sleepless nights. In many cases, this has also been a major

social friction amongst generations to get hold of this asset. The money

raised as loan could be re-invested by the recipient either through schemes

for monthly income for their upkeep and maintenance or for social and/or

economic upgradation which otherwise takes place through the practice of

gold loans which are anyway costlier and less remunerative as compared to

this scheme. It is not out of place to mention here that the present youth is

fast losing their gravity towards gold as an attractive asset as they are more

consumerist oriented and are a spending lot. It is this growing change in

attitude which the government can encash upon so that at the end of the


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decade of this scheme, gold as an investment would have undergone a

paradigm shift in the value system of the Indian society. Since these loans

are to be disbursed strictly through banks as transfers to the beneficiaries

account and these are further invested or consumed by the recipients this

would fuel economic activity resulting in higher consumption andinvestment.

Furthermore, there would be justification needed as to why the government

should offer interest free loans for a period spanning over 10 years and that

to for 70% of the value. Once such a scheme is introduced, there can be a

substantial presumption that many holders of gold, whether genuine or

through black money, would want to monetize their assets whether to

convert it to white money as a part of the voluntary disclosure scheme or for

genuine purpose of raising a loan. If this happens, over a period of time, the

value of the yellow metal will stabilize and will gradually correct as the

supply of gold would increase as compared to the demand. The question

arises as to what the government can meaningfully do with the gold so

collected. The government of India should apply this asset that it acquires for

multiple purposes. First of all this stalk can be used for increasing the stock

of rupee i.e. money, by printing currency to cater to the enhanced demand.

This, people may argue, may fuel inflation. Infact it could be the other way

round. The rush for gold monetization would reverse the psyche towards this

metal and the prices would drop which in anyway is waiting for an

opportunity to get towards the downward spiral. This trend of gold would

reverse the trend of the rupee vis--vis the dollar as value imports would

decrease thereby making it strong and positively helping the trade account.

Plus, in these 10 years, the same stalk of gold can be used for supply to

genuine jewelry usage to both domestic and export market. There is also a

possibility that the Indian economy could turn out to be a temporary

exporter of this metal. This is bound to have a telling effect on the

international prices of gold as India would be seen as a less active

participant in the international gold import market. The resulting

appreciation in the value of rupee will have a far reaching impact on the

import bill including that of petroleum imports. This would have a cascading

effect on reducing the inflation. All this put together is bound to have an

enormous positive psyche in the economy and give a boost to the economic

growth and activity. As in the case of the GST, this economic reversal


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towards the positive trajectory is bound to contribute atleast 2-3% in the

increase in GDP if not more. It may appear to be a magic wand, but strangely

it is actually so.

As for the return of gold to the offerers at the end of 10 years, since the

situation as it stands today, it is likely that many of them may not turn up to

take delivery of the yellow metal after 10 years. The reasons being the

attitude of the younger Indian generation today, the present attitude of

pledging gold for loans and not being able to recover it and the fact that the

aging and the aged would be offering it for their upkeep and maintenance

resulting in the next generation of theirs who are very much unlikely to come

up to claim the gold after repaying the loan taken by their predecessors and

that too at a time when the metal itself had undergone a deep correction at

the end of 10 years. This would ensure that not more than 10% would turn

up to collect the gold and 10 year is a pretty long time for the government to

be ready with this stalk of gold and that too at a lower price than what it had

taken it which is only 70% of its actual value when the transaction took

place. The fact that the offerer has the option of taking physical possession

of the metal at the end of 10 years is in itself an incentive for the people to

offer the metal for monetizing since in this process they are allowed to have

the cake and eat it too. Hence this transaction is bound to be a sure shot

success.

The loan received by the aging and aged would be but obviously invested by

them in high yield investments to make up for the inflation pressure faced by

them in their day to day living. And the consumerist section of the society

would use the funds for purchase of assets, durables, and non-durables etc

all of which are positive economic activities. Presently these positive

economic activities are pursued by pledging the gold to gold financing

companies and banks wherein the borrower ends up receiving the short end

of the stick.

Also, the positive impact of the rupee value on our current account situation

will also ensure that the government need not promote exports solely with a

view to foot the ever increasing import bill as it is done today by offering


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export incentives which in turn will end up as savings for the government in

the light of this scheme being successful.

Simultaneously the government can also issue 10year 6% tax free bondssimultaneously so that a part of the monetized amount could flow into this.

These could be like the benchmark 10 year bonds having similar features of

SLR and fiduciary compliant compatibility for financial institutions and banks.

This would ensure that over a period of time the governments effective

borrowing rate would come down from 8% to 6% thereby saving trillions of

rupees towards interest cost.

The icing on the cake which the entire scheme provides is the vast data

which would be available with the government as regards the wealth, the

wealthy and their whereabouts how so official, unofficial, significant or

anonymous they may be. The PAN number data and the UID data ensures

that this task is achieved. This database can be used for widening of tax nets

by the government especially in cases where presently the entities may be

disclosing income and its exemption from tax in the guise of being

agricultural income and thereby amassing wealth through gold. The

monetization of the gold wealth will in turn make them eligible for tax

payment through the income received by them out of the monetized

proceeds and hence the net can be cast on them. Finally for the skeptics, the

justification for this could be that gold as wealth in the Indian society need

not and is not necessarily and always be through illegitimate means. In many

cases it has been inherited through generations and in legitimate fashion.

The stalk has grown over ages in the hands of the individuals and it is

actually the present value and the inactivity which is the culprit. So the

scheme can be justified as one to activate this stalk though it may also

benefit illegitimate owners but so are the other schemes. Finally the engine

of growth which this scheme can provide through the monetization of this

wealth by fuelling economic development and GDP expansion through

penetration of its reach to all sections of society is in itself a good enough

reason for the scheme to be put in its place. As for the methodology of its

operation and its implementation and the fine tuning thereof, it is better we


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leave it to the experts in the field of finance and merchant banking. Finally,

this will be an excellent opportunity for the government to cleanse the Indian

economy and the society of its dead weight of its golden treasure.

15-01-2013

763, Annasalai , Chenani -600002

email: presidentnube @gmail.com

the golden paradox

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