All
that glitters: GOLD
In our article “Different Strokes” dated
February 12, 2018 we lauded the benefits of the redeployment of savings from
gold to financial instruments. The surge in yields for households could conceivably
be anywhere between 1.5% and 6% of annual income. Moreover, there are tangible
savings when money is borrowed from banks and micro finance companies, instead
of traditional informal sources that a large chunk of the rural population
currently depends upon. The reduction in interest cost could lie between 2% and
4% of income per annum. Even real estate investments, especially those in
utilised commercial properties create economic churn and are therefore,
productive. However, what is completely unproductive from even the most
generous benchmarks is gold.
Some estimates suggest that gold holdings
by Indian households and temples are about 22,000 tonnes. This adds up to a
colossal USD 1 trillion in dormant assets, at current prices. That is a huge
sum in the context of India’s economy, just a little under half its annual
output. Besides, India imports about 600 to 800 tonnes of gold each year
amounting to USD 40 billion – so pointless when there is so much of the stuff
lying unused.
What economies need is churn. Assets must
be used and made productive. The most effective way for this to happen is
through market mediation, as these create capital for investment and
consequently generate higher returns, albeit with some risk, for investors. It
seems very unlikely that the bulk of temple or household gold would ever be
sold and invested in more productive assets. But if a mechanism could be
involved where in the very least new imports are replaced by churning existing
gold holdings, this in itself could convert India’s current account imbalance
into a sizeable surplus. If on the other hand, households, temples and other
constituencies could find a way to convert the entire stock of gold into liquid
assets, it could create a capital base of a trillion dollars. This could theoretically
be leveraged many times over resulting in a mind-boggling impact on investment,
growth, employment and consequently wealth creation. Logically, the
monetisation of gold should also result in greater consumption, which should
drive investment, and consequently economic growth. The economy could therefore
shift gears into a sustainable virtuous cycle.
Arguably, Governments have over the years struggled
with various schemes to prod households and temples to monetise their gold
savings into financial assets. However, these schemes have so far only chipped
away at the margins. Emotional, religious and social considerations built over
centuries are hard to crack. Be that as it may, a persuasive campaign sustained
over several years and accompanied by a convincing financial proposition, could
make a dent in the current paradigm. For instance, most gold monetisation
schemes in the past have sought to convert people’s gold holdings (typically
jewellery) into bonds or bars and coins. The incentive for investors is that
they receive a liquid, tradeable instrument that is linked to the gold price
and therefore earns some returns. But the fact is, gold returns are generally
low and the inducement therefore insufficient. If a way could instead be found
to share with the investor a part of the ‘macroeconomic bonus’ that will accrue
to the nation as this paper has explained, the proposition becomes a lot more
attractive. Investors will shift less grudgingly when they see a combination of
tax benefits and better yields. The ultimate sums from shifts in gold
investments are simply so large that even a small share of the stash will have
a palpable impact. That way, India’s gold may actually add some glitter.
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