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How best to change the mindset of gold buyers

How best to change the mindset of gold buyers

By Nilesh Shah

In eight years between FY11 and FY18 India remitted $245 billion for net import of gold and precious stones. In FY19 gold smuggling is expected to be around $7 billion. Net import of gold and precious stones in eight years (FY11-18) is estimated to be around $300 billion on official as well as unofficial accounts, more than double of foreign portfolio investments of $145 billion received in the same period.

If the savings of Indians would have remained in India, our GDP could have been higher by $300 billion. In just eight years we have lost 11 per cent of our current GDP by misallocation of savings.

Gold is a sensitive subject for Indians for historical reasons. It is a form of social security for women. It allows slum dwellers to carry their wealth rather than risk it by keeping in their kaccha home. Gold is also a preferred form of storage for black money. India needs to discourage gold imports and monetise existing gold holdings to provide adequate capital for higher economic growth.

Buying of gold is very easy and convenient for millions of Indians. Unfortunately, the same can’t be said about financial instruments like bank deposits, mutual funds, insurance policies etc. We must make buying of financial instruments as easy and as convenient as gold buying. It is amazing to find millions of Indians buying gold in smaller denomination paying up to 25 per cent transaction charges.

Millions of housewives prefer a gold deposit with a corner jeweller than financial instruments. Ease of doing investments along with an appropriate distribution network will ensure savings shifting from gold to financial instruments.

Gold jewellery manufacturers should be encouraged to make lighter weight and lower carat jewellery. In a lighter vein, we must request our film and TV serial producers to show their characters with light-weight jewellery to remove the notion that a wedding or a social occasion won’t be complete without heavy gold jewellery. These steps will change the mindset of the society and impact gold demand over a period of time. A quickfix solution will be to tweak the existing taxation on gold.

Gold currently has 12.5 per cent import duty, which encourages smuggling. The government is losing about ₹6,500 crore annually by way of import duty on smuggled gold. Import duty levy has increased the market value of gold and created an illusion of higher returns. On a five-year basis gold returns look higher by about 2.5 per cent due to levy of import duty.

We need to change gold taxation from import duty to GST. Removal of import duty will discourage gold smuggling and other menaces associated with it. The government will benefit as smuggled gold gets into the tax net. For ease of collection, GST should be charged on imported gold when sold to jewellers by authorised importers. The jewellers should get input credit when they sell gold jewellery to the actual consumer. Jewellers will be revenue neutral as whatever they pay by way of GST will be available to them through input credit.

The behaviour of the buyer will change significantly due to the nudge effect. In an import duty regime, the buyer pays ₹112.50 and gets gold whose market value in India is ₹112.50 but in the international market it is ₹100. The instant loss of 12.5 per cent isn’t recognised by the buyer and hence gold becomes an investment. When gold is in GST regime, the buyer will pay ₹112.50 (₹100 for gold and ₹12.50 for GST) but gets gold whose market value is ₹100. The buyer will instantly realise the loss of 12.5 per cent. That will make gold an item of consumption. Shift of gold from investment to consumption will discourage the buying of gold.

India has suffered from flight of capital as Indians have remitted money abroad through various means. India should reverse the trend and attract global saving through a crypto currency backed by gold. Bitcoin and gold have a lot of similarities. Both are available in a limited quantity. Both are difficult to mine. Both can’t be destroyed. Both are recognised universally. Gold unlike bitcoin has a long history of acceptance as storage of value.

‘GoldCoin’ should be backed by physical gold on the lines of bitcoin. Operational and custody aspect of GoldCoin should be managed by the government at a nominal charge. Initial GoldCoins can be mined from the gold reserve of the RBI and public participation including foreigners. GoldCoins should be exempt from all taxes and questioning by regulators and tax authorities.

GoldCoins should be bankruptcy remote like PPF. GoldCoins initially will be linked to gold prices but will start moving higher on acceptance as a global means of payment like bitcoin away from the regulatory scrutiny. GoldCoin should offer the confidentiality of a Swiss Bank account, convenience of bitcoins along with the safety of gold.

We have experts whose services can be used to create volumes in GoldCoin. Through an initial circular trading among Indians we can create global interest in GoldCoin. GoldCoin on one side will increase gold prices and help create wealth effect for millions of Indians and will help monetise existing holding of gold. India may also end up attracting global capital through participation in GoldCoin. Our aim should be to give tough competition to Swiss Bank and bitcoin through GoldCoin to attract global capital without any cost.

Indians have invested trillions of dollars in gold and precious stones. Our economy would have crossed the $5 trillion mark, if that was monetised earlier. Better late than never. By monetising gold, we will provide adequate capital to our entrepreneurs to achieve $5 trillion GDP target.

(The author is MD, Kotak Mahindra AMC)

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