In Pune recently during the Bankers’ conference, Prime Minister Mr Modi had rightly observed, ‘Indians have a good habit of saving. But the focus has shifted to gold over time and banks have a challenge to look into ways to discourage huge amount of money being kept in gold’. The Finance Minister has in the recent budget echoed this in his budget speech. India by some account is home to 22,000 tonnes of gold accumulated over the years. Its current value at domestic prices should be Rs 56,32,000 crores – nearly a trillion $. This amount invested at the 10 yr G-sec rate of 8% would yield an income of Rs 4,50,000 crores per annum – good enough to wipe out poverty. Given the 36.3 cr people below poverty line (as per Dr Rangarajan Committee), it would give each of them Rs 1035 every month. (The weighted – rural and urban – average poverty line as per the Rangarajan Committee is Rs 1094). Alternatively, the reinvestment of interest alone at an ICOR of 4 would yield 1% additional growth.
Why this addiction to gold even by poor
People invest in gold for several reasons – glitter value, for dowry but most importantly to avoid crisis driven debt trap. As the Prime Minister rightly observed, ‘He (common man) thinks he should buy gold which can be monetised easily in a crisis. I don’t think out of 100 people, one person would feel the necessity of selling gold during a crisis…but it is a psychology’. For most savers (urban or rural) our savings bank interest rates are apathetic; nor is it inflation proof. The poor and much of middle class do not know of any other inflation proof yet liquid alternatives. From time to time sensex has performed better but it is far more volatile and hence less reliable if one wants to encash anytime. They cannot afford to have their savings in assets prone to valuation risks or difficult to encash. Gold is their insurance against debt trap (effective interest rates of money lenders and chit funds in unorganised credit markets start upwards from 60-100%) and liquid fund. Gold is readily en-cashable in any lot sizes, any time during the day, with just about anyone, at prices which are widely known. There is no commercial insurance available today with these properties coming anywhere close.
Developing Gold surrogates
India has tried Gold bonds and index funds without much success. It is not difficult to see the reasons for the tepid response they have received. They have all come up with rules, regulations and condition which suit the issuers more than the concerns of the investor. Just a sample. Sometimes Gold bonds are issued against deposit of gold (why not cash so that what would have gone into gold stays monetised), they can be exchanged back only for gold (why not cash), it can be done at the bank branch where the account is opened (gold can be exchanged at any place, 3rd parties, goldsmith, even relatives and neighbours). ETFs have overcome the first 2 disadvantages but not the latter. It cannot be transferred to goldsmiths and its reach in interior areas is poor Investments or redemption can be done only when the branch is open between 9 to 5, loans against them are sometimes not allowed, there are minimum units of investment like Rs 5000. None of these conditions apply in current actual practice. The villager may want it anytime even during a holiday, and the village moneylender gives loans for any value – large or small. The big impediment is the KYC. Much of urban gold is black money from various sources including real estate. In rural areas it is lack of familiarity. If we seriously want success, we should exactly replicate all the existing properties and convenience of physical gold, without any dilution and forget about all the tax and KYC niceties. Gold cards can be issued against cash or gold by banks, mutual funds, co-operative banks, or even large gold jewellery traders like Tanishque or recognised micro finance agencies. It can be issued without KYC and tax free of capital gains (de facto in any case that is the situation today) and in unit of account of grams of gold. It should be encashable at any bank (irrespective of the issuer), ATMs (for cash), Goldsmiths, or jewellery stores. The aim should be widest reach and acceptability.
Costs and benefits
The Government can give 1-2% interest rate on such bonds (gold investors suffer making charges now besides locker or insurance charges or risk, earn nothing now) and 1-1.5 % to the banks who can be mandated to keep 15-20% in physical gold as defence against any ‘run’. The current rate of covering the price risk through options and futures is about 2-3%. The balance 1-2% may be the government’s savings and can be accumulated over the years as reserve for any contingencies. Such surrogate gold will put less pressure on our currency, ease interest rates, make more funds available for investment, and enable the poor earn some income from their savings besides being inflation proof.
For quicker switch over
As an alternative to initially coax people to switch over faster to surrogate gold, government can offer price protected bonds. The bonds should pay back the current price of gold at the time of redemption or if the current price is lower than the price at the time of subscription, it should guarantee payment that price. This however requires careful hedging through futures markets which should be manageable in 1-2% costs. But given India’s dominance as a buyer in the World market, even if India reduces it purchases by 100-200 tonnes per annum there is likely to be a precipitous fall in its price and hence we may resort to selective stop loss based hedging to limit expenses.