From Pillow To Productive Asset — Can The Gold Exchange Make A Difference?
India has a love-hate relationship with gold. Indians love gold. Indian policymakers hate that they love it.
An estimated 24,000 tonnes of gold lies unused with Indian households and religious institutions, according to a 2018 report by the NITI Aayog. From time to time, efforts have been made to bring this gold into the productive economy — from gold monetisation schemes to gold bonds and now the gold stock exchange.
The gold exchange, cleared by the Securities and Exchange Board of India on Sept. 28, is first an attempt to make the over-the-counter gold market organised, transparent and completely electronic. But if developed from a wholesale concept into a retail concept, the demat form of gold holdings can potentially help households use their gold holdings more effectively.
"Gold in India is a totally different concept. It is completely intertwined with culture," said R Gandhi, former deputy governor of the Reserve Bank of India.
To change the thinking on gold is a long process but efforts like gold deposits, gold bonds, gold exchange will all contribute to some extent.R Gandhi, Former Deputy Governor, RBI
Making The Gold Market Transparent & Formal
The spot gold exchange, as detailed by SEBI, will introduce the concept of electronic gold receipts.
These EGRs, backed by physical gold holdings, will be like all other securities. They can be traded, cleared and settled. The vault managers, who will be responsible for maintaining the physical gold holdings, will be interoperable. This means that if a holder of EGR wants to withdraw physical gold, they can go to any vault manager and do so.
The lowest denomination of these EGRs has not yet been detailed.
The immediate impact, once the exchange comes into play, will be to alter the nature of the over-the-counter market, said Somasundaram PR, managing director - India at the World Gold Council. It brings transparency to pricing, quality and ownership. "The whole ownership and transaction process can potentially be put on a blockchain” he added.
The gold exchange should create a good framework for the bullion industry in eliminating counter-party risks and opening the doors wider for bank financing, Somasundaram said.
As a next step, the ability to convert gold in EGRs should incentivise banks to push their gold monetisation schemes further.
EGRs make gold more liquid and fungible, this should eventually boost the Gold Monetisation Scheme as it can support a thriving inter-bank marketplace, delinking collection and deployment capabilities.PR Somasundaram, Managing Director - India, World Gold Council
He added that eventually the product, if developed, could go down to temple trusts and even high net worth individuals, provided adequate regulatory clarity is provided on how this investment may be treated.
Agreed Samir Shah, executive vice-chair and co-founder of Dvara Holdings, who was formerly chief executive of NCDEX.
There is nearly 25,000 tonnes of pillow gold lying idle in India. It is stuck in lockers. If even some of this comes to the formal economy and you can recycle some parts of it, you could make a dent in imports. It can have a huge ripple effect benefit for consumers and the economy.Samir Shah, Executive Vice-Chair, Dvara Holdings
Unlocking The Benefits For Households
Establishing the spot gold exchange as a wholesale concept is relatively easier than taking it down to the retail level. But if done, it could help households get more out of their gold holdings.
"India’s gold market is characterised by low per capita consumption, huge idle stock and savings primarily in the physical form," said a NITI Aayog report, adding that India has one of the lowest per capita consumption of gold at 0.51 grams.
Gold is an important part of households in India, including rural households, said Shah. "It is a part of social existence, it a source of credit, a way to build livelihoods." But the informal nature of the market means that holders of this gold are at the mercy of the local jeweler in terms of price and assessment of quality.
The EGR is an attempt to solve this problem, said Shah. "Households can hypothetically convert their gold into EGRs, get a better price for that gold and use it, among other things, as a way to get more institutional credit," he said.
"It could be a game changer. It could also become a traders den but, if done well, it could help households take an idle asset and make it a productive one," Shah said.
Many Steps To Go
To be sure, to get to the point where the gold stock exchange can benefit household holders of gold, much remains to be resolved. Earlier attempts to bring household gold into the productive economy — from gold deposits to gold monetisation scheme and gold bonds — have all been plagued by design issues which prevented the products from taking off.
Gold EGRs could face similar issues.
"The tax treatment of EGRs remains to be resolved. In particular, the question of GST at various stages of the EGR and bullion behind it needs to be addressed with clarity," said Somasundaram.
For instance, a buyer may have bought gold and paid GST on it. Once this person converts the gold into EGRs, it may get traded multiple times and be subject to a securities transaction tax. However, at the point that an end buyer converts the EGR back into gold, that person will need to pay GST too. Also who will raise the invoice for this? Will it be the person who originally bought the gold and converted into EGR? Or will it be the person who last transferred the EGR?
To take the product to a retail level, an appropriate denomination will also need to be fixed. According to Shah, the lowest denomination should be as low as 1 gram. This will truly help it become a retail product.
Alongside, efforts have to be made to take the network retail. It could spawn a whole new industry of refiners, brokers and jewelers who could deal in the EGR product, said Shah. "It starts with wholesale guys, who have to bring the liquidity. But the real opportunity is at the household level."
According to Gandhi, no single initiative will be able to achieve what India has hoped to do for decades — bring household gold into the productive economy. But change has to be attempted by employing all sorts of measures, he said.
"It is worth taking these steps if we want to see change even 10 years down the line. None of these steps will be individually very successful but collectively they may make a dent."