Sticking to the directive laid out by the popular prime minister of India, Narendra Modi, India is pulling out all the stops when it comes to transforming the role that gold plays in its economy. Although most observers aren't expecting great success from any one of the government's proposed plans, no one can deny that they're looking at every possible option on the table.
These options range from monetizing gold to issuing national gold bullion coins; offering sovereign gold bonds; expanding the country's gold refining facilities; nationalizing the massive amounts of gold held in the country's temples; and exploring new domestic mining opportunities
Even as pessimism abounds, Indian policymakers seem willing to pursue any and all of the options above in order to mitigate the negative impact of the country's annual gold imports in the neighborhood of 800 to 1,000 tonnes per year.
GMS: Gold Monetization Schemes
In total, the various proposals are grouped together as Gold Monetization Schemes (GMS). The first and likely simplest measure for India to introduce would be a Sovereign Gold Bond (SGB). The plan is relatively straightforward: Indian citizens can deposit their investment-grade gold bullion into a bank in exchange for an interest-bearing bond.
The main drawbacks of the SGB are its scope and its cultural implications. In the former case, the gold deposit scheme can only potentially capture about a third of the country's gold imports. Roughly 300 tonnes of gold is brought into the country annually in the form of bars and coins. Meanwhile, somewhere near 70% of India's gold is in the form of jewelry.
Second, the direct use of gold as a financial asset is an anathema to Indian sensibilities regarding the precious metal. Although Indian families hold gold and pass it on as a form of savings, their affinity is for fabricated (often personalized) items made from gold more so than numbers in a bank account. Swapping actual gold for an SGB may even be viewed as tantamount to gold confiscation. The lack of a sophisticated banking culture in India is undoubtedly one of the biggest impediments to monetizing gold.
In regard to nationalizing the gold offerings at the country's Hindu temples, the cultural barriers are even more rigid. Few, if any, devoted Hindus would take kindly to their divine offerings being vacuumed up into government coffers.
True to its dedication to consider every option, the Modi Administration has also identified a few common-sense measures that will merely take time and funding, but should help somewhat. The country hopes to expand the number (and the capacity) of its few gold refining facilities. This would allow India to turn some of that exported gold into value-added products like jewelry. In addition, India is once again exploring domestic mining opportunities, which have largely been overlooked or deemed unprofitable up to now. The government will also offer its first legal tender gold bullion coin, which should also have some impact on how much gold is imported by helping meet domestic demand.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.