Market Update: India's Budget - policy and progress

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.

Coherent gold framework

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.

In our view, the government’s new approach is positive for India’s gold market. As we explained in Why India needs a gold policy, jointly published with the Federation of Indian Chambers of Commerce & Industry in 2014, a gold policy focused solely on imports will only encourage smuggling. As we see it, an effective policy needs to recognise the positive role gold plays in Indian society and strive to create a transparent and efficient gold industry.
 

A brief history of India's gold policies

India has a long history of implementing gold policies. Back in 1947, shortly after that nation gained independence, the government of the day adopted a draconian approach by banning gold ownership.

Policies were eased a little between 1962 and 1990 but, under the Gold Control Act (1968), the gold trade was tightly restricted. Manufacturing gold jewellery above 14 carat was banned and there were restrictions on how much gold jewellery individuals and households could own. Unsurprisingly, smuggling and surreptitious hoarding were rife.

During the economic reforms of the early 1990s the Gold Control Act was repealed. Gold flows became more formal and smuggling fell. But after 20 years the government felt compelled to intervene in the gold market once more. A ballooning current account deficit coupled with high gold imports led the government to impose trade restrictions.

Starting in 2012, import duties were ratcheted up from 2% to 10% and in 2013 the government imposed the market-distorting 80:20 rule – for every 100 tonnes of gold bullion imported, 20 tonnes had to be exported as jewellery. Over the course of 2014, the average premium over the London Bullion Market Association gold price was US$38/oz. At one point, it was as high as US$140/oz. Consequently, the smuggling industry boomed once more. 

In recent years, however, Indian policymakers have shown signs of developing more effective gold policies. For example, by removing the 80:20 rule, minting the Indian Gold Coin, and developing the Gold Monetisation Scheme. But these policies have not been joined-up and have not had the impact they could have had. This looks set to change.

For more information on India’s historic gold policies, please see: India's gold market: evolution and innovation

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