Modi government aims to turn idle gold into cash - KIRAN SHARMA, Nikkei staff writer

March 26, 2015 12:00 am JST

Modi government aims to turn idle gold into cash

KIRAN SHARMA, Nikkei staff writer

A woman tries on a gold necklace at a jewelry shop in Mumbai. © Reuters

NEW DELHI -- India, the world's top buyer of gold, is estimated to have more than 20,000 tons of the precious metal lying idle in its households. Seeking to tap this untraded gold and reduce imports, the government has announced a new monetization initiative.

     Under the program, Prime Minister Narendra Modi's government plans to sell sovereign gold bonds referencing the price of the metal and also introduce a gold coin as an investment product. In addition, there are plans to introduce an arrangement whereby gold deposits can earn interest and also be used as collateral for loans.

     India imports 800 to 1,000 tons of gold each year, according to its finance ministry. Demand rises during the festival season from August to October and the wedding season from November to May. The metal is a symbol of luck and an important gift for brides, who are usually decked in gold jewelry on their wedding days. In many Indian households, gold is also held as ornaments and insurance against the proverbial "rainy day."

     To that end, the government is hoping that the sovereign gold bond will be an investment alternative to holding the physical product. The introduction of a gold coin would also serve this purpose and help reduce demand for coins minted outside the country.

"Game changer"

Calling the deposit scheme a "game changer," the State Bank of India's research department said in a report that conservative estimates showed that even at a 30% strike rate, the monetary value of gold deposits mobilized may be as much as 3 trillion rupees ($48.0 billion).

    "This measure could instill a sense of confidence in the public and free up resources for productive purposes," SBI said.

    For Indians who are still keen on holding gold, the proposed coin would be a convenient and cost-effective way to add a small amount of physical metal to their portfolios, SBI said.

     London-based research company Capital Economics said anything that raises the profile of gold within the monetary system is likely to boost sentiment. "Liberalization of deposit accounts and issuing of gold coins may simply mean that existing stocks of gold held within the country are used more efficiently, rather than add to overall demand or imports. What's more, investing in gold bonds may be seen by some households as an alternative to buying and holding the metal itself."

     However, it added: "A piece of paper issued by a government, even one referencing gold, can never have the attraction or security of actually owning the precious metal in physical form. It certainly would go down badly as a wedding gift."

     Some jewelers also voiced uncertainty over the government's plans. Rahul Gupta, director of Indian jewelry chain P.P. Jewellers, said the government's gold deposit plan was impractical because people were unlikely to come forward with their gold.

     "There's always the threat from the tax authorities regarding the source of their gold," he said, referring to tax dodgers.

     According to the World Gold Council, 2014 was a "standout year" for Indian jewelry.  It said the combined volume of gold sold in India and China, the world's top two buyers, grew 71% over the decade through 2014, and that the two markets accounted for 54% of total consumer gold demand last year.