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.
Get the Market Update on India's 2018 Union Budget
Copyright and other rights
© 2018 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
All references to LBMA Gold Price have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other third party data and content is the intellectual property of the respective third party and all rights are reserved to them.
Any copying, republication or redistribution of content, to reproduce, distribute or otherwise use the statistics and information in this report including by framing or similar means, is expressly prohibited without the prior written consent of the World Gold Council or the appropriate copyright owners except as provided below.
The use of the statistics in this report is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a clear acknowledgement of the World Gold Council and, where appropriate, of Thomson Reuters, as their source. Brief extracts from the analysis, commentary and other World Gold Council material are permitted provided World Gold Council is cited as the source. It is not permitted to reproduce, distribute or otherwise use the whole or a substantial part of this report or the statistics contained within it.
While every effort has been made to ensure the accuracy of the information in this document, the World Gold Council does not warrant or guarantee the accuracy, completeness or reliability of this information. The World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly, from the use of this document.
The material contained in this document is provided solely for general information and educational purposes and is not, and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, any gold related products or any other products, securities or investments. Nothing in this document should be taken as making any recommendations or providing any investment or other advice with respect to the purchase, sale or other disposition of gold, any gold related products or any other products, securities or investments, including without limitation, any advice to the effect that any gold related transaction is appropriate for any investment objective or financial situation of a prospective investor. A decision to invest in gold, any gold related products or any other products, securities or investments should not be made in reliance on any of the statements in this document. Before making any investment decision, prospective investors should seek advice from their own financial advisers, take into account their individual financial needs and circumstances and carefully consider the risks associated with such investment decision.
Without limiting any of the foregoing, in no event will the World Gold Council or any of its affiliates be liable for any decision made or action taken in reliance on the information in this document and, in any event, the World Gold Council and its affiliates shall not be liable for any consequential, special, punitive, incidental, indirect or similar damages arising from, related to or connected with this document, even if notified of the possibility of such damages.
This document contains forward-looking statements. The use of the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, identifies a statement as “forward-looking”. The forward-looking statements included in this document are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on the analysis of World Gold Council of the statistics available to it. Assumptions relating to the forward-looking statement involve judgments with respect to, among other things, future economic, competitive and market conditions all of which are difficult or impossible to predict accurately. In addition, the demand for gold and the international gold markets are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the World Gold Council that the forward-looking statements will be achieved.
The World Gold Council cautions you not to place undue reliance on its forward-looking statements. Except in the normal course of our publication cycle, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and we assume no responsibility for updating any forward-looking statements.