5 ways to reduce the Indian appetite for gold

By R Jagannathan

If the finance minister is so keen to cut down on gold imports, here are five ways to do it.

First, make the interest earned on bank deposits tax-free up to a liberal limit - says up to Rs 2 lakh per annum. Currently, even a 9 percent fixed deposit rate yields an after-tax return of just over six percent. Now, when consumer inflation is at 10 percent, how is 6-and-odd percent a real return? Gold exchange-traded funds yielded more than 10 percent last year - and long-term capital gains are tax-free. As for physical gold, it’s almost always tax-free since the transaction is often in cash.

Second, treat gold the same as shares. Anyone who declares his gold holdings can be treated as having bought the stuff legitimately - even if he got it from the smuggler. Only, he would be required to pay short-term capital gains taxes on the same. Long-term gains are anyway tax-free. This will not only work as an amnesty scheme, but also improve government revenues from gold and build trust about its intentions on gold.

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Third, introduce inflation-indexed bonds that yield, say, two or 2.5 percent more than the wholesale price index, or 1 percent above the consumer price index. This will make the government’s anti-inflation credentials more believable.

[caption id=“attachment_599399” align=“alignleft” width=“380”] Those who only want to hold gold as a hedge or as a form of diversification of assets will be happy to opt for other alternatives.Reuters[/caption]

Four, abolish all taxes - both on interest and capital gains - on government bonds held by retail investors up to a limit - say upto Rs 50 lakh of holdings. This will not only improve the government’s penchant for the monetisation of debts, but also enable it to borrow at lower rates by widening the customer base beyond banks and financial institutions. Everyone knows governments don’t default.

Five, let the Reserve Bank of India float an ETF based on its own gold holdings, but with one caveat: the gold will be physically delivered to holders, if they want it, only after seven years. This could dent immediate physical demand for gold from those who are accumulating it for a rainy day. Seven years hence, who knows, we may be able to free all gold imports. People may be happy to collect the gains in rupee - which the RBI has plenty of.

The underlying assumption in these suggestions is this: those who love gold will continue to acquire it any which way they can. But those who only want to hold gold as a hedge or as a form of diversification of assets will be happy to opt for other alternatives.

These are the people to target.