Bullion Exchange a ‘Gold Move’, But Here’s How it Can Work Better

If suitable policy measures are adopted, Bullion Exchange can address multiple issues associated with GMS structure.

In the Budget 2020-21, it was announced that “GIFT IFSC has an approved Free Trade zone for housing vaults... With the approval of the regulator, GIFT City would set up an International Bullion exchange(s) in GIFT-IFSC as an additional option for trade by global market participants. …...” (Para 104(1))

The establishment of the Bullion Exchange will have far reaching impact on the way in which we trade in gold, and subsequently, on its supply chain, including the recycling of gold.

In India, the demand for gold is high, at about 800-1000 MT (Metric Tons) yearly, due to socio-cultural, religious as well as economic reasons. Such a high level of gold demand has resulted in high level of gold stock with Indian families/temples. Consequently, this gold stock of more than 20,000 MT, predominantly lies idle.

As gold mining is insignificant in India, the gold demand is primarily met by import of gold, which is about 7 percent of total import.

The Much-Needed ‘Golden’ Measures

This dependence on import for gold can be reduced by encouraging the recycling of existing gold stock, and such reduction may have a multiplier impact on India’s economy and foreign exchange reserves.

For this, the government has already been running a scheme called the Gold Monetization Scheme (GMS), launched in November 2015. The performance of this newly-launched scheme is not very encouraging, and the total gold collected so far under GMS is only about 20 MT.

With the introduction of the Bullion Exchange, the government will be able to address some structural issues of GMS (refer here for structure of GMS) and it will change the way in which we think about Gold Monetization.

Provided suitable policy measures are adopted, Bullion Exchange can address the following issues associated with GMS structure:

• GMS is targeting only the ‘stock of gold’ and ignores the ‘flow of gold’ in the form of imports (around 800-1000 MT annually). As jewellers are ‘point of sale’ in Gold Supply Chain, this ignorance has resulted into poor advertisement of GMS among gold buyer. The GMS may be better adopted among gold buyers if it is also provides option to deposit some part of gold purchase under GMS at a time of purchase. Such option at point of sale can be offered with collobration with Bullion exchange This can also address initial hesitation for gold deposit under GMS

Implementing Gold Monetization Scheme More Aggressively

• In the GMS process, Central Purity and Testing Centres (CPTC) are main points of interaction with public, where the purity of gold is tested, and gold is deposited. However, the credibility of these CPTCs is an issue due to their low net worth. The entire process of GMS assumes that bipartite/tripartite agreements will be enough to boost the credibility of CPTC. This ignorance has hurt the entire GMS system, and most of the CPTCs are non-functional (de facto), thereby leading to low retail participation in GMS. In this case, Bullion Exchange can work as counter party under which all CPTC-like institutions can work, and Bullion Exchange will be responsible and accountable for any loss occurred due to malpractice by CPTCs or systematic failure. As a result, other institutions like LIC and India Post can implement GMS more aggressively, and can ensure more deposits.
• The present GMS process does not allow depositor and banks to behave in a rational way. To a depositor, it does not give any option regarding utilization of their gold deposit to ensure maximum returns, and also GMS is available only for 1-3 year, 5-7 year and 12-15 year time periods. As a result, the entire scheme has become more process-oriented while overlooking the core of the monetization aspects. For banks, it ignores the basic notion that the main purpose of a commercial bank is to earn profit from deposits and for this, bank needs suitable policy framework & flexibility in utilisation of deposit, and these two can simultaneously be offered by Bullion Exchange. For depositor, GMS may be offered for continuous time period and many options for utilisation of gold deposit may be offered through Bullion Exchange by Banks
• The present structure focuses more on the ‘deposit of gold,’ and inadequate attention is given on ‘utilization of gold’ aspect, i.e. it rests on Say’s Law that outlines that if there is supply, then there will be demand, suggesting lack of wholesome planning for the success of GMS. Optimum avenue for utilisation of gold deposited under GMS can be ensure through Bullion Exchange

The Missing Links

But Bullion Exchange cannot address few of the other issues associated with its structure, some of them are the following;

1. The GMS scheme is divided into two parts;

• Short Term Bank Deposit (STBD) (1-3 year), where ownership is with the bank and Medium Long Term Government Deposit (MLTGD) where ownership is with central Government. In this case, medium term is 5-7 year and long term is 12-15 year. For collection under MLTGD, the Central Government pays the handling charges and commission to the banks to cover the cost associated with gold deposits.
• Such classification only reveals the government’s desire to deposit gold for the long term, but also has resulted in some costs which could have been avoided while achieving the same objective if alternative classifications had been adopted.

2. GMS does not link ‘ability to purchase’ with ‘ability to deposit Gold under GMS without any proof of purchase’. Such linkage may be useful to address fear factor associated with gold deposit.

3. GMS is not structured as a part of the ecosystem of bullion banking system in India. Many standard operating mechanisms and levers like repo or reverse repo kind of systems can be applied to cover some part of the loss incurred by banks/depositors due to systematic failure or to regulate the gold market.

Towards a Golden $ 5 Trillion Economy

The introduction of Bullion Exchange can give additional thrust to GMS and can address some of issues associated with its structure. Hence, suitable amendments synchronized with Bullion exchange can make GMS more lucrative and will be helpful in making gold into an asset class.

The role of GMS can be instrumental towards the vision of ‘New India’ and achieving the goal of US$ 5 trillion economy.

( Raj Kumar is the Deputy Director, Economic Planning Division Ministry of Electronics and Information Technology Government of India and Arjun Kumar is the Director at Impact and Policy Research Institute. The views expressed above are the authors own. The Quint neither endorses nor is responsible for them.)