An employee holds a one kilogram fine gold bar in the precious metals vault at Pro Aurum KG in Munich, Germany, on Wednesday, July 10, 2019. Gold rose for a third day after the Federal Reserve indicated that its preparing to cut interest rates for the first time in a decade as the global economy slows. Photographer: Michaela Handrek-Rehle/Bloomberg
Written by Mohan Kumaramangalam
In 1991, India only had three weeks’ worth of foreign reserves. Liberalising our markets was an idea whose time had come knocking at our door in the 1980s — it left us some cool drinks for our many summers of discontent that followed and, was finally back, ready to break down the door. This time we opened the door, liberalised our markets, and pulled millions out of poverty.
We survived, but we still wear the scars of near bankruptcy — always keeping a close watch on our forex reserves, fondly looking at the overseas inflows into our stock markets and admiring our FDI numbers. We sweat about overspending, foreign ratings and whether a flight of capital will lead to a sudden devaluation of currency, leaving us in a paralytic hyper-inflationary quagmire. Today, even though we are dealing with historic lows in the price of oil and a generally deflationary or recessionary environment across the world, a baggage of memories weighs the government down and prevents it from providing any real fiscal stimulus. Instead, we have a constant stream of monetary stimuli in a market where the problem is 80 per cent demand and 20 per cent supply.
The government of India has tried, over the last six years, to do what any good plumber would. It has poured in as much Drainex (in the form of LTROs, TLTROs etc.) as possible and provided outlets (IBC) to try and unclog the pipes (banks), hoping that the water will flow to where it needs to go. However, the rot (NPAs) has solidified, and in its tendency to turn to the stick to solve problems, the government has scared everyone back into fixed deposits, including the banks themselves. At the same time, demand has also taken a bit of a beating, leading some to postulate if India has fallen into the middle-income trap.
The Government of India needs an Atma Nirbhar strategy for its finances. A few weeks ago, I had suggested that the prime minister ask the balcony crowd to pledge that they would all buy Consol Bonds to help fund our war on corona. I am glad he did not because I believe his powers of persuasion could be better put to use — for a far more important task. The government has experimented with gold monetisation schemes (GMS) in the past but none have really taken off. The reason is that they had critical shortcomings, failing to recognise the fundamental cultural and social norms around the trade of gold in India. I believe that given the right conditions, the PM can motivate millions of Indian households who have invested a large percentage of their savings in the liquid asset of gold, to lend their gold to the government of India.
In 2017, the household finance committee released a report stating that the average household holds 11 per cent of its savings in gold. This is in contrast to developed economies where households hold a substantial portion of their wealth in financial assets. In India, gold remains a favourite way to save because of its ability to be valued and monetised in relatively frictionless environments. When Indians need money on an urgent basis, they reach for their gold which is mostly in the form of jewellery or guineas and pawn it at a trusted place that is likely part of the unorganised finance sector. With an estimated 850 tonnes procured by households in the last year alone, the total value of this holding at current prices would be 116 lakh crore, roughly half the IMF’s estimate of India’s gross domestic product (GDP) in FY20.
The stockpile of gold in Indian households can be successfully monetised by the government of India if it structures a scheme that first recognises the average Indian’s fear of the taxman and her healthy distrust of everything that glitters. This translates to not asking for the source of the gold being deposited and ensuring that the gold redeemed is the exact piece of gold that was deposited. A multiple-year, income tax-free gold monetisation scheme built on top of these two unshakeable tenets will allow the government to unlock a significant portion of wealth. In addition to the main tenets, I would add that the interest be paid annually in the form of gold certificates or cash equivalents on the value of the gold as on the interest due date. This might lead to a loss of capital for the government in the short term but would mitigate an individual’s fears around loss of returns in an environment where gold prices are on the rise. Lastly, everyone treats their gold as their rainy day fund, making it important that one can retrieve it easily and relatively quickly. Therefore the government must enable the depositor to redeem the gold/ gold jewellery deposited any time by giving seven to 10 days notice to the institutions/branches where the gold/gold jewellery was deposited. Given the tracking and encoding tools available today, this would not be a tall order.
There are those who would argue that since the world has long moved away from the “gold standard”, it would be pointless to stockpile gold to finance the deficit. I believe that aside from the immediate benefit of printing against real assets which could mitigate some of the government’s fears around potential downgrades and devaluation, unlocking the investment potential of our household gold could serve as a perennial source of our growth. A growth that is the only way to lift millions of our people out of poverty, and India out of the perennial status of being a middle-income country. Growth, the Atma Nirbhar way.
The writer is the working president of Tamil Nadu Congress