Budget announcement could boost liquidity in India's gold market supporting the development of gold-backed financial products-WGC

The government's new approach is positive for India's gold market, stated World Gold Council (WGC). An effective policy needs to recognise the positive role gold plays in Indian society and strive to create a transparent and efficient gold industry. India, a nation that accounts for around a fifth of annual global gold demand, has a long history of gold-focused policies. These, however, have often distorted the market rather than achieving policymakers' aims. Announcements in the Union Budget on 1 February 2018, however, suggest this might change. Arun Jaitley, India's Finance Minister, explicitly highlighted the government's desire to formulate a comprehensive policy to develop gold as an asset class, create gold exchanges, and revamp the Gold Monetisation Scheme. The Budget also included policies designed to boost rural incomes. Better gold policies combined with rising incomes could bode well for India's gold industry.

In the 2018 Union Budget, the Finance Minister made three key announcements on the government's plans.

 

-It intends to formulate a comprehensive gold policy to develop gold as an asset class. This represents a significant change of tack and could have positive implications for India's gold market. For example, it could encourage regulators to embed gold in India's financial architecture and financial institutions to develop gold-backed financial products, making it easier for institutional and retail investors to access gold.

-It intends to establish an efficient system of regulated gold exchanges. This is an ambitious aim. India's gold market is highly fragmented and riddled with inefficiencies. For example, gold trades at different prices in different cities. A regulated exchange can result in a more efficient and transparent market, which should boost investors' trust in gold as an asset class. It could also support the development of India's recycling market, as well as the Gold Monetisation Scheme (GMS).

-It intends to revamp the GMS, which, if done correctly, could make it easier for consumers to open Gold Deposit Scheme (GDS) accounts.

These policy announcements are all interlinked. Revamping GMS can support the gold exchanges, and the development of the exchanges can support GMS. And this could boost liquidity in India's gold market, thereby supporting the development of gold-backed financial products.

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