India is once more on the gold standard – sort of.
Smuggling and a black market in gold coins and jewelry have prompted the Reserve Bank of India to lift the ban on importing gold, while introducing a new gold coin and a financial instrument through which interest can be earned on the yellow metal.
India is one of the highest gold-consuming countries in the world. Prior to June 2013 importation of the metal was not a problem. The RBI then blocked the import of gold coins and medallions, imposing convoluted restrictions on both banks and import companies through which these establishments were required to export 20 percent of their gold before they could import 80 percent of their needs.
According to an early March RBI press release, nominated banks can once again import gold, only being required to prove delivery. The banks do not have to identify any end-use for the metal. The banks can now lend that gold as a loan to gold companies. Star trading houses and other export houses can once again import gold.
As part of the 2015-16 budget proposal India Finance Minister Arun Jaitley announced, “I propose to mint gold coins with the Ashoka Charka, which will help to recycle gold internally in India.”
Ashoks Chakra is a symbol depicting India’s highest peacetime military decoration. Jaitly said the new issue “would help reduce the demand for coins minted outside India and also help to recycle the gold available in the country.” This is consistent with India’s “Make in India” goal.
Jaitley also proposed a Sovereign Gold Bond as an alternative to purchasing physical gold. The SGB would include a fixed interest rate and be redeemable at the spot price or face value of the gold at the time of redemption.
The bond proposal effectively monetizes gold. The bonds replace the current gold deposit and physical metal loan system, while allowing a yield on the investment that holding physical gold does not offer. This also eliminates the overhead cost of melting the metal and of gold as only being a long-term investment.
Poopley Group Director Rajiv Popley was quoted in the Feb. 28 The Economic Times newspaper as saying, “This will aid in abolishing black money and laundering in gold. Understanding and taking into consideration the sentiments of Indian consumers, the government is making a clean path for investing in gold. Wealth tax abolishing will also encourage purchase, as this was taxed earlier.”
Popley continued, “Consumers will declare the gold purchases made, as the wealth possessed by them is not taxed under wealth tax. Jewelers will not be considered black marketers or accrued of money laundering, as this is a chain reaction. Consumers don’t declare purchases due to tax evasion and, hence, jewelers can’t declare their sales.”
All India Gem and Jewelry Trade Federation Director Bachhraj Bamalwa said, “Banks will start selling these gold [Ashoka Charka] coins which will attract investors. This means that more gold will have to be imported, which may again cause the current account deficit to swell. We were expecting [the] import duty on gold to be reduced from 10 percent to 2 percent, which would have spurred consumption of gold in the form of jewelry. That will not happen.”
According to World Gold Council statistics, the investment demand for gold in India dropped by half during 2014, to 180.6 tons from 362.1 tons a year earlier when gold could be legally imported.
The lifting of sanctions on gold imports revives a system through which banks borrowed gold from international bullion banks, lending it to domestic Indian jewelers. An increase in smuggling gold into India led to the jewelry industry lobbying the government to relax its ban on imports. Gold coins and medallions can once again be imported, however restrictions on banks selling these same coins and medallions remained in place at the time this article was being written.
Another bonus, according to BullionDesk.com, is that the Indian government gold coin is a positive step towards the nation addressing the lack of standardization and quality control for physical gold products sold in India.