Incentivise banks to promote gold monetisation: India Gold Policy Centre

With the Government of India's (GoI) Gold Monetisation Policy yet to taste real success in triggering increased circulation of gold in the economy, a research paper at India Gold Policy Centre (IGPC) suggests the policy's effectiveness depends on incentivising banks and understanding consumer sentiments. The scheme launched in November 2015 with a much fanfare to mobilise idle gold in the country to use it for the economy has met with a poor response with a few tons fresh mobilisation.

Part of 14 such papers introduced at the recent Conference on Gold and Gold Markets, 2018 by IGPC at the Indian Institute of Management, Ahmedabad (IIM-A), the research paper was co-authored by Priya Narayanan, Balagopal Gopalakrishnan, Arvind Sahay of IIM-A.

The paper quotes a nation-wide survey-based study of 1,171 households as well as an interview-based study of senior management of six banks, five gold refiners and one industry consultant. Titled as 'Gold Monetisation in India as a Transformative Policy: A Mixed Method Analysis', the paper also uses an econometric analysis of gold consumption and its potential determinants were conducted using household data from all 640 districts of the National Sample Survey for 2011-12.

Based on the results of the studies and analysis, the paper suggests that the effectiveness of the gold monetisation policy depends on a "deeper understanding of consumers' interactions with and sentiments towards gold".

"The effectiveness of the policy also depends on recognising the challenges faced and incentives required by banks, refiners and other stakeholders in implementing this policy. This research is an attempt at developing such an understanding," it further states.

Among the three methods in the paper, the nation-wide survey across 10 states constituting roughly three-quarters of annual national gold consumption, was conducted to understand the consumer associations with and attributions related to gold. According to the paper, the study showed that family functions and festivals were triggers for gold purchase, indicating ingrained the habit and planned accumulation.

"There is also high liquidity and safety association of gold (which is also not considered as having any substitute) along with a clear reluctance to sell gold received as a gift. Rural consumers are more reluctant to part with gold as compared to urban but are also ready to pledge gold as collateral suggesting requirement related liquidity use of gold," it stated.

Further, discussions with different stakeholders in the interview-based study showed that banks would promote products based on this policy if they had more control on the process and if there was a clear separation of risks or effective mitigation of risks relating to the operationalisation of the policy.

Finally, the analysis showed that propensity to consume gold is positively correlated with the proportion of females in the household and with a number of daughters in the household. "Also, ceteris paribus, rural households have a higher propensity to consume gold, and Hindu households have a higher propensity to consume gold," the paper stated.