Captains Speak

Published: Mar 15, 2022
Updated: Mar 15, 2022

Golden’ scheme to boost GDP

GOLD MONETIZATION SCHEME

Since centuries past, the intrinsic value of gold has been recognized the world over. Hence, many countries have followed the gold standard for the valuation of their currencies and have guaranteed that, on demand, they shall pay their currency value in the shape of gold. After the Great Depression of 1930-33, there was reluctance in accepting the currencies of other countries due to the mismatch of the ‘reserve gold stock’ with their central banks. Hence, international trade and financial transactions were severely affected. In 1944, around 44 leading nations entered into the ‘Bretton Woods’ agreement. By that time, the central bank of the US was holding the largest stock of gold. Hence, the US dollar was accepted as a global currency

GAIN FOR RUPEE

The prime objective should be to push India into a high-growth trajectory. For this, India needs cheaper funds for investing in infrastructure and other capital assets. By adding deposited gold in the forex kitty, the rupee will appreciate and the country’s sovereign rating will also improve. That will attract cheaper global funds. Another objective should be reducing gold imports by selling and lending a part of the deposited gold to jewellers. The sale proceeds will also provide cheaper funds to the government. Eventually, this will reduce the trade deficit and directly add to the GDP.

For achieving the aforesaid objectives, the scheme needs radical changes in a single go instead of piece-meal amendments. The key strategy should be for the deposit of gold to be accepted as a part of the forex kitty and a ‘Gold Deposit Certificate’ (GDC) to be issued on behalf of the RBI by banks.

The GDC from the RBI will provide high security and comfort to gold depositors. A predictable and friendlier tax, as suggested in the book, is an essential pre-requisite for the success of the scheme. The GDC should be tradable and transferable. The trading of the GDC must be integrated with the stock exchange and be converted into a ‘liquid security paper’. By this, the demand of gold investors, about 250-300 tons per year, can be met through ‘paper gold’ (GDC) and gold imports will reduce to that extent within 1- 2 years.

For meeting the balance consumption demand, the RBI may sell part of the deposited gold through designated agencies. Some quantity of gold can be given as a loan to banks for onwards lending to jewellers.

WIN-WIN FOR BANKS

The sale proceeds may be lent to the government at repo rates. By this, the SLR obligation of banks will reduce and bank credits will expand, pushing up the GDP. The overall lending rate will also soften, and that will benefit the entire economy.

Through a combination of selling and lending of gold, the entire demand will be met from the deposited gold and gold imports will reduce to almost nil in 2-3 years. By this, the trade deficit will reduce by about 2.1% of the GDP, which will directly add to the GDP.

As a crucial strategy, the unsold stock of gold, being the most dependable international currency, may be treated as a part of the forex reserves. The unsold gold stock will be an ‘international asset’ against the ‘domestic liabilities’ in the balance sheet of the RBI. By this, India will have a surplus ‘international asset’ and its sovereign rating will take a leap. Eventually, that will appreciate the rupee.

MORE BENEFITS

By this, global funds will flood into India at a cheaper rate. That will meet the investment needs of the country and boost the GDP. Thus, with a proper strategy, the benefits can be multiplied. The recent revamping of GMS-2015 is certainly a good (RP Gupta is the author of ‘Turn Around India’, ‘Jan Andolan’ and ‘Turn Around India-2020’.) step but it needs major revamping to realize its full potential.

The RBI shall redeem the GDC to the GDC holder on an ‘on demand’ basis in the shape of physical gold only, along with the accrued interest. Simple interest should be applied annually on the value during the deposit. The GDC will keep on changing hands and redemption in the shape of physical gold might be very low. Thus, the unsold stock will always exceed 50% of the deposited gold. More so, sizeable interest-free funds will be available with the RBI towards unpaid accrued interest.

Besides other suggestions, the issue of tax hazards is also addressed in the book within the existing framework which is crucial for the success of scheme. With proper incentives, India may receive 6,000 tons of gold deposits in the next five years. That will boost the GDP by 3.5-4.5% along with several other benefits, as estimated and quantified in the book.

By and large, the scheme is designed for the productive usage of ‘idle’ gold (past physical savings) and the mobilization of foreign savings (global funds) at a cheaper cost for meeting the investment needs of India. All stake-holders, such as depositors, the RBI, the government, banks, jewellers and the public will be beneficiaries.

At this juncture, this scheme could indeed be a gamechanger. This is an opportune time for implementing such a financial innovation. However, it is imperative to enact structural reforms boosting the investment rate and making India globally competitive, along with such financial innovation, for delivering long-ranging benefits to the economy.

(RP Gupta is the author of ‘Turn Around India’, ‘Jan Andolan’ and ‘Turn Around India-2020’.)