Cash ban brings down India’s gold imports

Bloomberg

It seems the only way to stop Indians from buying more gold is to take their money away. Prime Minister Narendra Modi’s government spent 16 months trying to persuade Indians to deposit their jewelry in the bank to earn interest, in an effort to curb soaring imports of the precious metal. But the program has only lured a tiny fraction of the $900 billion of gold that families and temples are estimated to have stashed away. On the other hand, Modi’s controversial decision to withdraw all high-value banknotes did the job instead.
Coupled with a higher import tax, the abolition of 86 percent of the nation’s banknotes in an anti-corruption drive helped push gold imports down 39 percent last year to 558 metric tons. Overall consumption in India tumbled to 676 tons, the lowest since 2009, according to the World Gold Council. That’s bought Modi some breathing space to persuade Indians to recycle their gold in a country where jewelry plays an important role in weddings and festivals and is handed down to daughters for their own weddings.
“We Indians don’t like to sell our gold,” said Samsher Aliyar, a 29-year-old Mumbai cab driver. “My grandmother’s generation and even my parents aren’t going to deposit their gold with the banks as they consider it a part of their children’s inheritance. In a worst case scenario, we would take a loan on it.”
Modi set up the plan in November 2015 to try to curb India’s massive annual imports of the precious metal that were contributing to a record high current-account deficit and a slump in the rupee. But so far it’s only lured about 6 tons in the past year out of the 24,000 tons the World Gold Council estimates is locked away in India’s houses and temples.
“The government tried, but the people are not coming forward,” Devendra Kumar Pant, chief economist at India Ratings & Research Pvt., the local unit of Fitch Ratings, said by phone from New Delhi. The government is under less pressure to fix it because “the position right now on the current-account side is relatively comfortable.”
If the gold deposit system is going to work, banks and refiners need to improve awareness of the system and make it easier for customers to use, said Rajesh Khosla, managing director of the country’s biggest bullion refiner, MMTC-Pamp India Pvt. Ltd., and a member of the industry committee that the government consulted when defining the plan.
Under Modi’s plan, holders hand over that jewelry, or at least part of it, to a bank in return for interest payments on the value of the precious metal and a promise to return the equivalent amount of gold or cash at the end of the loan term.
The customer first has to take the jewelry to an independent assay office nominated by the bank to verify its purity. The bank then sends the gold to a refiner before finding a buyer for the resulting bullion.
The complexity of the process, shortage of registered assayers and the risk to the lender in holding the metal have all damped banks’ enthusiasm for the program. “Nobody is willing to take paternity of the scheme so it has become an orphan, and orphans always gets neglected,” said Khosla. “Somebody should take ownership of it. The government needs to crack the whip with banks.” The government is exploring ways to promote the plan, D. S. Malik, a spokesman for the Finance Ministry, said by phone from New Delhi without providing further details.
The lenders face challenges in terms of safeguarding the collateral and leveraging it, said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives & Commodities Ltd., by phone from Hyderabad. “The handling of physical gold is a tedious business.” The decline in India’s gold imports has removed a potential pillar of support from global prices. Bullion for immediate delivery is down about 12 percent from its high in July and traded at $1,201.71 an ounce in London on Wednesday. Concerns over rising US interest rates as the American economy picks up have also pressured prices.