India owns over 18,000 tons of above ground gold stocks worth approximately $800 billion and representing at least 11 per cent of global stock, according to World Gold Council.(WGC). estimates.
This is equivalent to nearly half an ounce of gold ownership per capita, a figure which is significantly below consumption in Western markets, representing scope for additional future growth, says a WGC research paper entitled 'India: Heart of Gold'.
Gold Demand
In 2009, total Indian gold demand reached $19 billion, or Rs 974 00 crore, which accounts for 15 per cent of the global gold market, according to WGC.
While Indian consumers continue to stock gold despite rising prices, when it comes to total gold reserves in the country, India ranks 11th in the world with 557.7 tons of gold. Above the ground gold stocks is different from the total gold reserves.
Over the past ten years, the value of gold demand in India has increased at an average rate of 13 per cent per year, outpacing the country's real GDP, inflation and population growth by six per cent, eight per cent and 12 per cent respectively.
The country currently has one of the highest saving rates in the world, estimated at around 30 per cent of total income, of which 10 per cent is already invested in gold.
Storing surplus gold
In this backdrop, the setting up of a National Gold Bank (NGB) assumes importance and needs to be seriously considered. Such a Bank if set up can gradually pave way to have stock of surplus gold in the economy in one place.
Over a period, the Bank can have a say in controlling the volatility of gold prices in domestic market in particular and can also act as a regulator of bullion market which is fast expanding and having international linkages.
The Bank can engage in the purchase and sale of gold and act as a trustee/pledgee for banks/institutions having gold surplus and also keep gold for safe custody or raise funds against gold to meet their liquidity constraints.
As it is, the rate of growth of deposits of commercial banks has been on the decline for the past few months and the investments in gold and real assets have been on the increase.
Generally Indians have a weakness for gold and the demand for gold is price insensitive as per the experience. It is all the more so, when the real rate of interest on deposit has been negative or insignificant compared to the rise in gold price
The banking system has been facing the liquidity problem off and on and rising of funds from the market poses series of difficulties. Funds are becoming a major constraint to develop infrastructure badly needed by the economy to grow and sustain growth. It is time for banks to find alternate sources of funds to continue to be vibrant in business and providing the well needed support system for the economic growth. One of the means to attract deposits is to encash the idle gold lying in the economy. In this context, the revival of the gold deposit scheme introduced in 1999 has to be seriously considered. As per the World Gold Council, India’s annual gold consumption Is around 800 tons per year and the reserves of gold could be in the order of 25000 ---30000 tons.
Gold as Deposit
The banks should be encouraged to accept gold as deposits and create fixed deposits linked to gold keeping very good margin. To start with, for instance, for pure gold worth Rs 50,000, the banks can create a fixed deposit for Rs 25,000 for a minimum period of three years and give an interest rate of say 3 or 4 percent per year. The investor earns interest rate on the idle gold while securing his holdings the same time it is safer under the custody of the bank.
For the banks, they get gold as deposits and they should be in a position to raise funds against the security of gold. The borrowing power of the banks increases in the market and they will have required resources to expand their credit portfolio.
The banks should be given exemption from SLR for these deposits against the gold as there is no additional liquidity created and the liabilities are fully backed by the gold they possesses. However, the borrowings that these banks subsequently make against the gold can attract SLR and the advances they create can attract usual capital adequacy norms.
Advantages
The advantages of setting up a National Gold Bank are very many. The Bank can make bulk purchases from the open market including international market and act as a store house of gold for banks and institutions. The banks and institutions holding gold can sell the same to the National Gold Bank or raise funds by pledging the gold. This will bring down banks' borrowings from the Reserve Bank. The National Gold Bank can have a refinance arrangement with the Reserve Bank till such time it stabilizes its operations. Money market operations can be better regulated as the black money component gradually come down if the gold held in the country is brought under regulated market.
Over a period when the Gold Bank’s operations get fully stabilized, the influence of gold in the market becomes somewhat predictable and circulation of hard cash and black money gets reduced, then framing of monetary policy and transmission of signals to financial markets by the Reserve Bank will prove to be easy.
For the economy, benefits out of the Gold Bank are tremendous. The idle gold turns into cash to expand economic activities particularly the infrastructure and the gold and financial markets widen. It facilitates to minimize generation of black money in a way as the gold becomes a declared asset with the banks.
Once a large quantum of gold comes under the custody of the Gold Bank, the Governments fiscal policy and fiscal deficit can hope to have a totally different scenario than what is today. The image of the economy in the International market will improve It will be a win- win situation for banks, investors, the economy, and the Government.
T.V.Gopalakrishnan
(Views are Personal)
(This appeared in Business Line dt 24/01/11)
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