Attractive gold bonds can reduce imports.

A plausible reason for suddenly doubling the import duty on gold, that also prior to the Union Budget, while the Budget session was already round the corner, could be that the government wants to discourage the import of gold. Such a vision could emanate from the thought that (i) gold is a dead asset, (ii) the import of gold causes a drain on foreign exchange reserves and (iii) gold imported in India is not put to any economic use; rather, it lies idle in bank lockers.

But, factually speaking, Indian households love gold. So, whatever be the import duty, it would not deter Indians from buying gold. The flip side of an import duty increase is that it encourages the import of gold through unofficial channels, that is, promotes smuggling.

A more effective tool to achieve this objective could be the issuance of gold bonds with attractive interest coupons. The scheme should be so attractive that it would lure Indian household to deposit their gold ornaments with banks/RBI-approved mints in exchange for a gold bond. This gold can be melted, refined, converted into hallmarked gold bars and resold by the banks in the domestic market. This would help reduce the import of gold in India without impacting the domestic demand and supply dynamics.

As per unofficial estimates, the stock of gold with Indian household is at least 20,000 million tonnes (MT), while the yearly size of import is around 800 MT only. If only 5% of Indian households’ stock of gold could be targeted under the gold bond scheme, this implies import substitution for the entire year without disrupting demand and supply factors.

However, in the past, gold deposit schemes launched by banks failed to attain much success. Therefore, it is crucial to take a lesson from such experiences and make the gold bond scheme so attractive that nobody could afford to refuse. The government may notify various tax incentives for this purpose. Such incentives could be exempting gold bonds from capital gains tax and wealth tax, interest accrued on gold bond to be tax free, etc. Moreover, gold bond should provide multiple options to investors, such as: (i) it should be convertible into gold bars at specified banks, (ii) it should be convertible into cash at the price prevailing on the date of conversion, and (iii) it should be tradeable on electronic spot exchanges.

The government may even work out modalities for the fungibility of such gold bonds into ornaments at approved jewellery shops. For instance, a person holding gold bonds worth 100 grams of gold should be able to convert it into jewellery worth 100 grams after settling the making charges.

Most importantly, gold bonds should be issued in small denominations in demat form, so that small investors holding just a few grams of gold may also be able to use this facility. On the other hand, the demat form of holding would be more suitable for keeping track, easy transferability and an efficient record-keeping model.

E-gold, launched by National Spot Exchange, has already become popular among tech-savvy investors. It is also possible to work out a model by way of an arrangement between the exchange, bank and NSDL/CDSL to convert the existing physical holding of gold held against e-gold units into gold bonds, so that e-gold investors may earn a reasonable return on their holdings.

Evidently, during difficult times, the government should come out with innovative ideas to tackle the issues. Markets provide various solutions to contemporary issues. For instance, tapping domestic household gold through an innovative gold bond scheme and using this gold for import substitution would be an ideal solution to save and protect foreign exchange reserves.

Source : financialexpress.com