TURNING THE IDLE GOLD INTO A PRODUCTIVE ASSET IN INDIA

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India is grappling with the highest ever current-account deficit, the broadest measure of trade, mainly because of its gold and crude oil imports, weakening the rupee to a record against the U.S. dollar. Over the past few years, investment in gold has increased significantly especially in bullion, bars, and securities related to bullion. www.unitedworld.edu.in

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TURNING THE IDLE GOLD INTO A PRODUCTIVE ASSET IN INDIA

  1. 1. TURNING THE IDLE GOLD INTO A PRODUCTIVE ASSET IN INDIA By Pousali Mukherjee
  2. 2. TURNING THE IDLE GOLD INTO A PRODUCTIVE ASSET IN INDIA Indians love gold. More than 18,000 tones of the metal is lying in Indian households. This is enough to supply Americans with all the gold they want for the next 100 years. That's the theory. In reality, very few Indians would want to sell the gold they own. Nearly 83% of the respondents in an online survey conducted by economictimes.com last week said that despite the high prices, they were not considering selling their gold holdings. In fact, 85% wanted to buy more gold this year, and 28% of these were determined to do so irrespective of the price of the metal. India is grappling with the highest ever current-account deficit, the broadest measure of trade, mainly because of its gold and crude oil imports, weakening the rupee to a record against the U.S. dollar. Over the past few years, investment in gold has increased significantly especially in bullion, bars, and securities related to bullion. These are completely unproductive assets, which involve sucking out money from our banking system and parking the funds abroad. Households and temples carry about 25,000 metric tons. The only way India can reduce its dependence on imports is to tap the gold lying with individuals and temples. By doing this, the country can reduce influx of gold at these high prices. Appetite for gold is never going to diminish. India can cut imports by offering investment plans that offer returns equivalent to gold, extend tax incentives, easy liquidity and redemption in physical gold through tie-ups with banks and jewelers. The government and the Reserve Bank of India (RBI) can consider buying idle gold from investors and routing it to jewellers to replace imports. Banks could be allowed to hold gold as security under the statutory liquidity ratio (SLR). Basel norms permit banks to hold gold as part of SLR. This will result in banks buying gold from the public and selling securities they hold under SLR. Tax amnesty may however be required to lure high net-worth individuals. A large amount of black money in the system is said to be held in the form of gold.
  3. 3. In case of gold deposit schemes, a smaller quantity (100g instead of a minimum 500g at present) may also be accepted. The interest rate could be a little less than the savings bank rate, which is four per cent on average. Restrictions imposed by the government and sales ban of gold coins and gold bars by Jewellery associations played a crucial role in the decrease of imports,GJF added. the recent past, measures such as hiking import duty, dissuading banks from dealing in gold, and discouraging non-bank financial companies from extending their gold loan portfolio. As part of augmenting its reserves, the Reserve Bank of India can purchase gold from the domestic market to augment its reserves base in the face of dwindling foreign currency reserves. A suggestion has been made earlier that the central bank can deal in gold as part of its market operations. In a way, augmenting gold reserves will help the central bank sell dollars in the domestic market to preserve the value of the rupee, without losing its reserves base. There is a need to introduce new gold-backed financial products to reduce the demand for physical gold. The first could be a modified gold deposit scheme where gold taken as a deposit could be recycled to meet the domestic demand and given back at the time of maturity. Finally, a gold pension fund can be introduced where the customer surrenders gold to the bank under an agreement to receive streams of monthly pension till his death.
  4. 4. High Current Account Deficit (CAD) is the main reason that has continuously impeded all efforts of government in arrest the fall of rupee. India posted a record current account deficit of 4.8 percent of gross domestic product (GDP) in the year ending March. Government’s failure to explore new destinations has led to poor growth of exports. In the absence of a single window clearance system and process delays, exports have failed to register good growth. Even traditional export areas have failed to show resilience making Indian produce globally less competitive. The Prime Minister attributed the sudden and sharp depreciation in rupee to various domestic and global factors like high current account deficit (CAD). According to him the rupee has been badly hit because of the large current account deficit and some other domestic factors. The deterioration in CAD has been mainly on account of huge import of gold, higher cost of crude oil imports and recently of coal. According to him the steps that can be taken to control current account deficit are as follows. Clearly they need to reduce appetite for gold, economize the use of petroleum products and take steps to increase exports. The Prime Minister said, adding the government will take all possible steps to bring down CAD below USD 70 billion this fiscal. The Prime Minister said the medium term objective of the government will be to reduce CAD to 2.5 per cent of GDP and the government will make all efforts to maintain a macro economic framework friendly to foreign capital inflows to enable orderly financing of the current account deficit. According to him the most growth friendly way to contain the deficit is to spend carefully, especially on subsidies that do not reach the poor, and Government will take effective steps to that end. The RBI announced late on Wednesday a special window to sell dollars through a designated bank to Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp. The move will remove $400 million to $500 million of daily demand from the spot market. Oil is India's largest import item and state refiners are the biggest buyers of dollars in the foreign exchange market. Recently the Reserve Bank hiked FII investment limits in government securities and corporate bonds by USD 5 billion each, taking the total cap in domestic debt to USD 75 billion, with a view to bridging the current account deficit. The three-year lock-in period for foreign institutional investors (FIIs) purchasing government securities (G-Secs) for the first time has been done away with.
  5. 5. The sub-limit of USD 10 billion for investment by FIIs and long-term investors in G- Secs stands enhanced by USD 5 billion. The limit in corporate debt, other than infrastructure sector, stands enhanced from USD 20 billion to USD 25 billion. With increase of USD 5 billion in each of the two categories, FIIs and long-term investors can now invest USD 25 billion in G-Secs and USD 50 billion in corporate debt instruments, taking the total to USD 75 billion. The overall FII limit of domestic debt is distributed through a host of categories across Government, corporate and infrastructure debt.
  6. 6. www.unitedworld.edu.in

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