With two-thirds of India’s gold held in rural areas, efforts to curb its imports with schemes to monetise holdings or convert them into paper bonds won’t have much sheen till the mindset towards physical possession of the precious metal is changed, experts maintain.
Their comments come against the backdrop of two schemes proposed by Finance Minister Arun Jaitley recently for which the norms are awaited - one on monetisation or permitting gold deposits with banks for interest, and the other on redeemable gold sovereign bonds also with fixed interest.
“Bonds will get comparatively faster acceptance among the urban investors, but the success of the bonds will also depend on the customer, the rural people,” K.A. Babu, head of retail business with Federal Bank, said.
“The rural folk in India are believed to be in possession of 65 percent of physical gold in India, mostly in the form of jewels. They need to move out of the emotional view on gold and see it purely as a vehicle for investment,” Babu added.
In the past year, the curbs imposed by the government did have an impact. Gold demand, for example, fell 13.55 percent in volume terms to 842.7 tonnes, against 974.8 tonnes in 2013, while in value, it fell 23 percent to $34.27 billlion, from $44.70 billion.
Data with the World Gold Council (WGC) further showed that the decline was mainly on account of a 50-percent drop in demand for bar and coins in volume terms to 180.6 tonnes from 362.1 tonnes, as the demand for jewellery actually grew eight percent to 662.1 tonnes from 612.7 tonnes.
The industry also feels the two new schemes will impact imports further. But by how much?
“Gold imports will go down by at least 25 percent, if the two policies are implemented. But the government must include jewellers too,” said Bachhraj Bamalwa, immediate past president of the All India Gems and Jewellery Trade Federation. Babu felt the schemes can attract up to 100 tonnes.
But Suvankar Sen, executive director of Kolkata-based jeweller Senco Gold and Diamonds, was not sure about the actual impact. “The two new schemes will reduce imports. But the people in rural areas are not quite ready to part with the yellow metal,” Sen said.
“Gold is a reflection of lifetime savings. I am not quite sure how they will connect to the schemes psychologically,” Sen said—an assessment shared by Federal Bank’s Babu, who said the rural people also saw gold as something auspicious, easy to trade.
From bankers to jewellers, there appeared to be some unanimity on at least one major impact that the two schemes could potentially have—that of unlocking the available gold stocks from the people, as also bringing more investible money into the system.
“The additional money from the gold bond scheme can cut interest rates for stakeholders, while the gold monetisation scheme will unlock the savings that people have already made by buying physical gold,” said Vikaas Sachdeva, chief executive of Edelweiss asset management company.
Explaining further, Sachdeva added: “As the money under the two schemes will be routed through the banking system, it shall fall within the purview of the Reserve Bank of India (RBI). It can then use the usual policy measures in its armour to control inflation.”
According to the All India Gems and Jewellery Trade Federation, another important factor that must be considered while introducing the two schemes will be to also include the jewellers, since they are the ones who deal directly with customers.
“It will be easier for jewellers to convince the people to melt the yellow metal for investments and present a fair estimate of gold jewellery. Tie-ups with banks need to be made beforehand to implement the scheme through jewellers.” Bamalwa said.