Nothing but grandstanding: Budget proposals on gold unlikely to help govt
Minting gold coin is one Make in India initiative Modi could have avoided
The Budget 2015 was comprehensive in terms of its analysis of all the issues affecting the economy. The Finance Minister came up with three initiatives as far as gold that holds morbid fascination for the nation is concerned.
He announced the government’s move to mint its own gold coins bearing the impress of Ashok Chakra. This is one Make in India initiative he could have avoided because it is nothing but grandstanding.
What is the point in minting gold when we cannot mine it in our own country? It is common knowledge that we have mined every gram of gold in Kolar mines in Karnataka and fresh discoveries are eluding us.
In the event, we import anything between 800 and 1,000 metric tonnes every year to sate our ravenous appetite for the yellow metal as much for making jewelry as for investments. The savings made on account of made in India gold coins would be negligible -- the making charges as well as the possible trade discount arising out of bulk import by the state a sizeable part of which would willy-nilly have to be expended in running the official coin establishment.
Of course, there can be a bit of chest thumping by the swadeshis at having ousted hallmarked gold coins.
The State Bank of India is already salivating at the prospect of bagging the lion’s share -- Rs 1 lakh crore worth of gold -- of the new gold deposit scheme, the contours of which were drawn in the budget.
The extant scheme insists on a deposit of minimum 500 grams and on sending the gold to the smelters involving considerable expenditure. It seems gold biscuits and coins would also be allowed to be deposited under the proposed new scheme.
While this will definitely save time and money on melting and enable investors in gold to earn interest on what is essentially a non-income earning asset, the new scheme would be dogged by the same inhibitions that has been plaguing the extant one.
Interest at present is 1% per annum which does not enthuse many save temples like Vaishneodevi, Tirumala Tirupathi Devasthanam (TTD) and Shirdi Sai Baba Trust for whom even 1% translates into a tidy sum given the largeness of their gold holdings plus their tax free status.
For others, the fear of taxman coming calling hot on making the deposit is too grim a possibility to ignore even if the interest is hiked marginally.
The third initiative envisaged by the budget is sovereign gold bonds, which is nothing but paper gold that would render import of gold redundant with its attendant consequence of not exerting pressure on BOP. While it might wean away investors in gold, it might prove to be expensive for the government should the yellow metal appreciate significantly in value at the time of maturity.
President Nixon got away with his sudden disavowal of the gold exchange standard his war-time predecessor Roosevelt had launched — bring $35 and take one ounce of gold — when the appreciating gold prices rendered the standard unviable except at a huge loss.
Modi would be pilloried more than he is now being pilloried for his reckless election promise of bringing back Indian black money stashed away abroad that would see as much as Rs 15 lakh in every citizen’s bank account if his government were to renege on its promise.
Of course, retrieving foreign black money was an election eve rhetoric made with typical Modi flourish but there is no way the government can duck its sovereign commitment.
On the flip side, if the yellow metal appreciates only marginally on maturity vis-à-vis its face value, the investors would be disillusioned as they would rue their decision to have put up their money on an unattractive scheme even as the government laughs all its way to bank. That the world at large is witnessing gold scarcity on the back of lack of fresh discoveries makes the scheme dicey.
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