A solution to India’s obsession with gold

Sep 16 2013, 05:05 IST
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SummaryIndia’s obsession with gold is nothing new.

India’s obsession with gold is nothing new. It may be noted that India had a gold control policy since Independence that was abolished in 1990, following the BoP crisis. Policymakers in India have tried several options in the past, like issue of gold bonds, voluntary disclosure scheme, considered having a gold bank and have also tried a gold deposit (GD) scheme, all of which met with limited success. Recently, there were reports in the media suggesting that the government is planning a GD plan whereby commercial banks will buy gold from ordinary citizens, divert it to metal refiners to curb gold imports, and thereby put a check on India’s burgeoning CAD. In fact, this has now been suggested even by the PMEAC. While such a scheme was tried in 1999 but did not succeed, we hereby offer a plan—a vanilla suggestion of GD, but with some crucial distinctions from the earlier ones. This, we believe, may be a much better way of managing the country’s obsession with gold and provide a breathing space for now.

Gold has always been in the news, even internationally. The US, before 1933, had an exchange rate mechanism, defined as Gold Standard, where the dollar was defined in terms of gold. After the abandonment of the Gold Standard, the world moved to Bretton Woods, a quasi-Gold Standard exchange rate mechanism, whereby gold transactions were limited to official settlements with other countries’ central banks. The world formally moved out of such a system in 1974, with the dollar being globally recognised as the principal medium of transaction. However, post 2000, following a commodity market boom, the yellow metal is back with a vengeance. Additionally, countries like China have been aggressively diversifying their cash reserve position away from dollar-denominated instruments (between 2004 and 2009, China doubled its official holdings of gold by 500 metric tonnes). India also augmented its gold reserves by purchasing $6.7 billion of IMF gold in November 2009, possibly as a strategy of asset diversification.

Coming back to our GD scheme, we have listed the salient features of our GD scheme in table 1 and offered a juxtaposition of our proposed scheme with the 1999 one. Let us make it clear that what we are suggesting is not a gold buy-back scheme but a pure GD scheme.

Given the juxtaposition, we also estimated the potential benefits to the economy because of a such scheme. For this, we

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