Allow banks to keep gold as part of liquidity reserves, says WGC

This would make use of the bullion originating from local sources and reduce dependence on imports

India should allow banks to keep gold as a part of their liquidity reserves, making use of the bullion originated from local sources and reducing dependence on imports, according to a report produced jointly by industry body Ficci and the World Gold Council (WGC).

Gold demand in India - one of most avid purchasers - is interwoven with culture, tradition, the desire for beauty and the desire for financial protection. Over the past five years, annual demand has averaged 895 tonnes, equivalent to 26 per cent of total physical demand worldwide.

For many years, India has remained one of the leading markets for gold. However, as India has little domestic supply, demand is primarily satisfied by imports. The cost of these is partially responsible for today’s current account deficit. From January to September 2014, Indian demand was 620 tonnes. The average demand in the same period over the past 10 years has been 616 tonnes.

“We believe the solution to meeting India’s enduring appetite for gold lies not in restricting the import of gold but in making better use of the gold already in the country, making it a productive fungible asset class like any other financial saving. The need of the hour is to re-engage all stakeholders to develop a coherent long-term India Gold Policy that results in a robust infrastructure for gold, drives standardisation and transparency, encourages gold-based investment products and supports the economic priorities of the country. With India at the centre of the global gold eco-system, it is imperative that we find ways of mobilising and monetising the 22,000 tonnes of gold in Indian households to fund economic growth,” said Somasundaram P R, managing director - India, WGC.

The report recommends the government take a number of initiatives to restrict gold import into India and encourage supply from local sources.  “Establish an India Gold Exchange to ensure pricing standardisation, increase transparency and improve supply and demand analysis. Also, establish a Gold Board to manage imports, encourage exports and facilitate development of the infrastructure needed to ensure the Indian gold market functions to maximum effect,” the report said.

According to WGC, the government should develop accredited refineries in line with international standards, including upscaling the current domestic refineries. Drive monetisation of gold by incentivising banks, revitalise gold deposit schemes, introduce gold-backed investment and savings products. Create a more active marketing strategy for Indian handcrafted jewellery. This could boost exports and highlight India’s expertise in this highly-valued sector e.g. by promoting handcrafted ‘India-made jewellery’ like the Swiss-made watches,” it added.

Further, the report emphasised the need to drive the standardisation of gold so that buyers and sellers can have faith in both the quality and price of their products. Introduce guidelines for compulsory quality certification of all forms of gold to encourage accountability and foster an environment of trust.

“Gold has always been an integral part of the socio-economic ethos of the Indian household. The consumption of gold has always been greatly intertwined with the Indian household’s financial planning goals and has, through generations, remained an obvious and natural choice of saving of all households,” said A Didar Singh, secretary-general, FICCI.

Banks’ initiative could incentivise financial institutions to introduce gold-based savings products, said the report.