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Tuesday, January 31, 2023

Gold reserves of India can make India a golden bird again... at least economically!


ARINDAM CHAUDHURI | New Delhi, August 30, 2013 14:37
Tags : Indian economy | Economic slowdown | Gold | Indian Rupee | RBI |

Many may not be aware, especially in our part of the world, that back in the year 1933, on April 5, US President Franklin D Roosevelt signed one of the most controversial orders in American economic history. The Executive Order No. 6102 criminalized the possession of gold by individuals and corporations and forbid “the hoarding of gold coins, gold bullion, and gold certificates within the continental United States.” This order was an extension of the Presidential Proclamation No. 2039 that criminalized the hoarding, possession and ownership of gold or bullion, and imposed a monetary penalty of $10,000 (equal to more $170,000 in today’s value) and imprisonment for as long as ten years on individuals falling foul of the law.

Obviously, such laws on hindsight look very undemocratic and politically suicidal; but then, if one were to explore it and go beneath the surface, the big picture may gradually get vivider. In tough economic times, gold and similar forms of monetary elements can become a key source of increasing money flow in the market. One should remember that most nations (including ours) have at one time or the other even printed money based on the amount of gold kept in the federal bank (Reserve Bank of India, in the case of India). In other words, hoarding of gold by communities, corporations and individuals not only decreases the flow of money (given the unproductive capital locked within such hoarded gold) but also to a large extent disturbs the supply-demand equilibrium of gold and bullion. Before I reach India, let me in brief discuss the way Uncle Sam tapped (or as many critics would say, exploited) the Executive Order No 6102. The order forced every American citizen to surrender all their gold, leave 160 gms, to the Federal Reserve in exchange of a fixed amount of money. After receiving most of the gold, the US government increased gold prices manifold, thus churning out a huge amount of profit, which was used for the Exchange Stabilization Fund (ESF), a fund that enables the American government to control currency exchange rates. In 1964, the previous laws were modified and the ownership of ‘gold certificates’ was legalized, followed by the legalising of gold trade in 1974 – after almost three and a half decades.

The importance of and aspiration for gold ownership in India requires no introduction. Despite economic turmoil, the consumer demand for gold is up by 51 per cent in Q2 2013 while the demand for gold bars and coins is up by 116 per cent. As per various unofficial estimates, more than 60,000 tonnes of gold are lying idle in the form of jewellery and ornaments all across the nation. Going by the current price of gold at the rate of Rs.35,000 for ten grams, this unaccounted reserves could create a possibility of reaping about Rs.2,10,00,000 crores in money supply! Going by World Gold Council figures, Indians hold 20,000 tonnes of gold (which is an absurdly less figure, as a single temple in South India holds more than 1000 tonnes of gold); even considering this reduced figure of 20,000 tonnes (which is 33% of the unofficial estimates), the amount we’re talking about would be nothing less than Rs.70,00,000 crores!
Against these jaw-dropping numbers, what looks hilariously minuscule is the state of RBI. Despite such huge national deposits of gold, RBI has an official reserve of a mere 550 tonnes of gold, compared to 1000 tonnes of China (which is again debatable) and 9000 tonnes of US.

The Government of India should immediately draft and announce a Central Gold Bond scheme, where it should ask people to deposit their gold with the government in lieu of Central Gold bonds at a fixed rate of interest of around 9%. One reason I mention this percentage is because in my calculations, I have realised that despite the huge surge in gold price, in the last 65 years the same has increased by only around 9% per annum compounded. With respect to the government’s gold bond scheme, people should of course be allowed to take back their gold after say a period of 15 years. The same will be applicable for temples, trusts and other similar institutions; for them, the government could even make it compulsory to deposit all gold and make hoarding beyond a limit illegal. These institutions should be thankful that the government is not nationalizing their gold hoardings, given the immense employment generation potential this money can have. Thus, a huge percentage of gold in physical form would be directed to the Reserve Bank, which, in turn, would utilise the same to increase the money flow and to adjust the exchange rates of our currency.  Similar schemes have been in the past practiced by many European and African nations, with the latest being Venezuela.

This one scheme would serve several purposes. Firstly, it will make the INR stronger, subsequently boosting international trade, especially our mandatory imports; because, with the INR getting weaker, the cost of doing cross-border trade is increasing and the old deals signed at old exchange rates are becoming infeasible to continue. Secondly, it will create huge employment opportunities if the money so sourced is invested honestly in infrastructure or for energy generation/oil production and other such extremely key needs of this country. The money thus minted should only be used for employment generation and entrepreneurship, which eventually would increase jobs in the market and would spirally improve the flow of money further. Thirdly, the entire process of converting physical gold to paper gold would decrease the incidents of gold smuggling and gold hoarding and above all make all gold possession transparent.

Apparently, as of now, it is impossible to even estimate the amount of gold lying inside our nation; and most of these gold hoardings have evaded taxes too; as even today, domestic consumption of gold is not through authorised outlets but through trusted local gold traders. In such cases, tax-evasion is a cake-walk.

Such schemes would obviously invite criticism, but when the economy is going through tough times, the political corridors need to take some tough and non-populist steps. The only apprehension that I see here are scams and corruption. Even an iota of embezzlement would create a dynamo effect and ruin the entire economy and social harmony. In such a situation, the entire execution needs to necessarily be politically independent and under a body such as CAG or Supreme Court with everything being tracked electronically and centrally. The fall of INR to Rs.68.80 per dollar is a matter of utter shame, especially after luxuriously introducing an expensive sign for rupee! After all, as they say, looks can be quite deceptive!

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Posted By: Dipanjan Das | Panagarh | October 17th 2013 | 07:10
Fully agreed with u Sir...
Posted By: Rintu Dey | Dibrugarh | October 14th 2013 | 02:10
I fully endorsed your view, but our government have not that guts, coz they will only think of their vote bank not the development.
Posted By: Anil Tiwari | Howrah | October 12th 2013 | 11:10
you r correct sir
Posted By: Bane | Udupi | October 9th 2013 | 07:10
It may be an eye opener but all this does not revive India as a golden bird again. Let the gold be as it is the problem here that you and me know is that a foul presence in politics does not keep the country going. We need a proper government to take a strict lead for Indian Development and these measures may wake up undesirable troubles.
Posted By: Kinito Chishi | Nagaland | October 6th 2013 | 02:10
Sir, in my Opinion the corruption topic must be considered primary as in the case of now. well the matter of Gold hoarding will seems very much luring for more scames presumably because of its attractive value and in the presence of so much scratches even in the public funds that our politicians make for themselves. Yes, no doubt this idea shows surety for our economy's progress but only when its served with a staunch security against any sort of arbitraries be it politics which is in the fore front.
Posted By: Joshi Ajay Deep | Yamunanagar | October 5th 2013 | 19:10
Our corrupt govt.s will swindle away all these reserves. We have no trust on our system also.
Posted By: Gaurav tiwari | LUCKNOW | September 29th 2013 | 16:09
very good thought sir i appreciate this article n your consideration for our country's well-fare.. i think govt should also think this way to release our country from this economic downfall.
Posted By: kaushik RC | Mumbai | September 24th 2013 | 23:09
superb sir! This is a very nice option to trickle down the currency crisis. Bt our law makers should bw made aware of this option na and willingness is necessary.
Posted By: akanksha pareek | Jaipur | September 21st 2013 | 10:09
corruption is not the price we pay for democracy... yes!! there is a rampant corruption is the society not in govt. sector but also in other sector..if India stop importing gold for a while and starts selling it in the global market..we can surely fortify rupee value !
Posted By: Muneer Ahmed CP | Kondotty | September 17th 2013 | 15:09
Good article.
Posted By: samir | Mumbai | September 16th 2013 | 11:09
corrupt indian politicians and beurocrats will take our gold and after 15 years they will return us yellow metals with certificate that yellow metal is 99 percent gold.
Posted By: Rachana | Pune | September 13th 2013 | 23:09
I always used to wonder that why Americans and Europeans never wear jewellery like us or get dressed like us . It's because of such policy ... Very thoughtful by Uncle Sam . Indeed also Dowry might get obsolete and we can have a nation with equal rights for men and women.
Posted By: Kumar Rishav | Nagpur | September 10th 2013 | 19:09
The point is quite clear.Corruption topics will just be an excuse.The Gold scheme will surely help the exchange rates!!Great idea,must say! The temples in South India alone can make the big submission.They are loaded with the element.But the temple thing will never happen!!Because there are many to raise their voice against such good things in the name of God!! The govt. should immediately implement this. US has a gold deposit of 9000 but India has only 550,not a joke!!We can very well improvise our exchange rates. As mentioned above in the article-"Such schemes would obviously invite criticism, but when the economy is going through tough times, the political corridors need to take some tough and non-populist steps."
Posted By: Saurabh Rai | KOLKATA | September 10th 2013 | 00:09
Sir, i agree with you but how can we trust our corrupted system??
Posted By: Jalindar | Taiwan | September 9th 2013 | 21:09
Current rupee devaluation is due to black money out flow from UPA as election is heading. it should recover to some extend after election but regaining confidence of those who lost money and confidence in investing in India will take a long time. We can not follow US stratagy as India is different country with scams. we may loss our national stability in following other countries.
Posted By: Ramachandran | Trichy | September 25th 2013 | 15:09
Mr.JALINDAR:100% right.
Posted By: Anonymous | | September 9th 2013 | 17:09
After taking all the gold from people, each ounce of the gold will somehow reach Switzerland bank accounts of our politicians. Already they are not leaving any method to scam and loot public money. They will announce lakhs and lakhs of populist measures (like food security bill) just to get them vote security bill in next elections, whatever be the nations economic condition after that, it will not matter to them. It will take only 1 or 2 years to plunder all the gold foolishly by politicians.
Posted By: Sharath | Bangalore | September 7th 2013 | 01:09
This is no doubt a good scheme. But it may not work in a country like India.The funds garnered will go into some idiot's pocket.
Posted By: Shatsangv | Chenai | September 6th 2013 | 22:09
Definitely, it'll make huge difference. But the problem is that India is full of corrupt people!!
Posted By: Charan | USA | September 5th 2013 | 23:09
Will mandatory or perhaps forcibly confiscating of Physical Gold by the Government of India from the citizens of India in lieu of a Paper Bond is just ripping off people of their hard earned Gold. My question to you is whether introducing these kind of draconian schemes will change the future of this corrupt nation?
Posted By: Praveen Katti | Belgaum , Karnataka | September 3rd 2013 | 12:09
Posted By: Chetan | Muzaffarpur, Bihar | September 2nd 2013 | 10:09
What about the gold shopkeepers and karigar's of gold jewellery. And how believes in corrupt system. We deposit our gold and they create several of scams. Then what we do . More then 5 Cr. People are directly or indirectly depends upon in gold making.
Posted By: Sasank Iyer | New Delhi | August 31st 2013 | 22:08
The article is very well written and the analysis has been done well. The only problem with the above scheme is that people will rebel against such schemes as gold has its value to them. Moreover, the money may not be utilised properly and yet another SCAM might take place.
Posted By: Prateek Srivastava | New Delhi | August 31st 2013 | 20:08
thoughtful article. The country has immense potential to evade the current crisis.

Issue Dated: Feb 5, 2017