returning non-resident Indians. Third, gold imports are permitted through special import licenses (SILs). These reforms have affected hawala transactions somewhat. But the price differential is still significant enough for hawala transactions to continue, even if one nets out transaction costs associated with smuggling. There is fragmentary evidence to suggest that better enforcement along the Western coast has diverted gold smuggling to the East. Smuggling will remain until gold is placed on the open general license (OGL) at reasonable rates of duty. While the Tarapore Committee does not mention the OGL and duty issues explicitly, these are obviously necessary for the other recommendations to make sense.
The committee has also proposed a well regulated market in gold with gold derivatives and futures trading. In the first phase (1997-98), banks and financial institutions will be allowed to freely sell gold to residents. There will be gold denominated deposits and loans, working capital gold loans and deposit schemes like gold accumulation plans. In the second phase (1998-99), gold derivatives and forward trading will be introduced. Indian entities will also be allowed to function in international commodity markets. To some extent, the reform measures must proceed in tandem, since a broad-based domestic commodities market provides the synergy needed for efficient participation in global markets. A gold bond scheme was introduced in 1993. This was the first step in integrating gold markets with other financial markets. Apart from the objective of infusing greater liquidity into the gold trade, the proposed reforms have the added advantage that gold becomes an asset like any other asset. Thus, there will no
longer be any need for a special policy on gold and the precious metal will lose its glitter. This is as it should be. Countries gave up the gold standard many years ago, even though most people still seem to think that gold is precious because it provides a currency backing. The recommendations on forward trading are unlikely to be implemented immediately. Contrarians will argue that if non-residents are allowed to dabble in forward trading, there will be capital outflows and balance of payments pressures. While such arguments continue, the country can make a beginning by straightaway moving gold to the OGL.
