Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Government Budgeting; Effects of liberalization on the economy.

Key phrases: Gold Imports, Trade Deficit, Import duty, Gold Monetisation Scheme, Bullion banks, International gold spot exchange (IIBX), GIFT City, gold exchange-traded funds (ETFs)

Why in News?

• The sharp surge in gold imports this fiscal once again turns the spotlight on the need to find alternative avenues to meet the insatiable demand of Indians for the yellow metal.

Keypoints:

• With consumers on a buying spree after the second wave of the pandemic, gold imports between April and November 2021 was at a nine-year high of $33.23 billion — around 50 per cent higher than in the corresponding period in 2019-20.
• The surging gold imports this year could also turn problematic as the trade deficit has expanded since September, hitting a multi-decade low in November 2021.
• The rupee is also under pressure due to the rising trade deficit as well as continued foreign portfolio outflows.

Concerns:

• The last time gold imports crossed $30 billion in the first eight months of the fiscal year was in 2012-13.
  • The Reserve Bank of India was then forced to take drastic measures to curb imports including hiking import duty sharply and laying down that 20 per cent of gold imported should be exported as jewellery.
  • The RBI’s actions were prompted by current account deficit expanding to 4.8 per cent of GDP and the rupee depreciating sharply.
• High gold imports is a structural issue in India. A recent report by the World Gold Council pointed out that gold imports by India have been consistently high since 2012, averaging 760 tonnes per year.
  • In 2016-2020, imports made up 86 percent of India’s gold supply while recycling accounted for 13% and mining accounted for just 1 percent.
• High duties have led to an increase in unofficial imports with eastern, north-eastern and southern states of the country acting as the chief conduit for gold smuggling. Moreover, the Gold smuggling has shifted to air and land routes from the sea.

Way Forward:

• It is clear that the Centre needs to find long-term sustainable solutions to increase the domestic supply. The obvious way to do so is to bring some of the 25,000 tonnes of gold held by households and temples into circulation.
  • The Centre needs to consider another Gold Monetisation Scheme (GMS) that offers higher returns compared with the previous schemes and is better tuned to the feeling and emotions of consumers.

The scheme was launched by the government in 2015 with an intention to put the idle gold stored by individuals in their homes and bank lockers to productive use.

• A scheme that promises that another equivalent piece of jewellery will be returned to the customer at the end of the deposit period could find more takers.
  • One of the drawbacks of the ongoing GMS is that the customer loses the jewellery and gets a gold coin or bar at the end of the scheme.
  • Further, keeping gold jewellery at home offers financial security to many in case of emergencies.
  • An individual may find it easier to sell his/her gold jewellery to a local jeweller in case of a medical emergency or in the event of income loss than find a buyer for gold bonds in the secondary financial market.
  • Also, while selling gold, individuals are not required to undergo Know-Your-Customer (KYC) process.
• Building greater awareness towards non-physical forms of gold such as sovereign gold bonds and gold exchange traded funds will also help reduce investment-led demand for physical gold to some extent.
• It may also be a good idea to set up Bullion banks that focus on gold loans to retail and rural customers. The prime function of these banks will be to mobilise the surplus gold with citizens through gold monetisation schemes.
• They can also buy and sell gold in the bullion exchanges being set up in India and in the offshore business centre in GIFT City, thus imparting liquidity to these exchanges.
• According to WGC, bullion banking is one of the key pillars to address multiple challenges faced by India’s gold market, such as a lack of quality assurance, the unorganised state of the market and a lack of trust in international markets.
  • In 2020, the average daily trading volumes on futures and spot exchanges was $69.3 billion, with gold exchange-traded funds (ETFs) generating average trading volumes of $3.3 billion. India’s contribution to these was just $1.2 billion and $3.4 million respectively.

Conclusion:

• There are significant opportunities to emerge as a global bullion trading hub through the international gold spot exchange (IIBX) with a thriving domestic bullion eco-system underpinned by globally recognised standards and infrastructure.

Source: The Hindu BL

Mains Question:

Q. Indian gold imports have continued to rise despite high import duties. Analyze and suggest some long-term sustainable solutions to increase the domestic supply. (250 Words)