Gold Imports: Budget: Unleash the Gold Ecosystem to Generate Jobs and Exports
Let’s stop at the beginning of 2013, when gold tariffs were only 4%. However, by the end of this troubled year, it had climbed to 10% after three successive increases.
2013 was of course the year India’s current account deficit exploded to alarming proportions and we were on the verge of a ratings downgrade following a sharp depreciation of the rupee. A drastic response was the need of the hour and, predictably, the ax fell on gold imports. Since then, India’s foreign exchange reserves have fallen from $280 billion to a comfortable level of over $630 billion today. But the customs duty on gold has not moved.
Is it then necessary to reduce customs duties on gold? Yes there is, and it goes far beyond the usual complaint about how he unnecessarily revitalized smuggling gold.
A widely reported estimate suggests that 25% of all gold entering India is smuggled. This represents more than 200 tonnes on average each year. Between 2015 and 2020, around 11,000 kg of gold, worth more than Rs 3,100 crore, was seized in 16,555 gold smuggling cases at various airports in India, according to government data. As grim as these numbers are, the case for lowering gold tariffs rests on more fundamental factors.
In 1924, the influential economist John Maynard Keynes called the gold standard (and by implication gold) a “barbaric relic”. Economists and policymakers have long looked down on gold, especially in India where a good portion of household savings is spent on gold. It is considered negative for economic development because gold ends up in safes and vaults and is not available for circulation in the economy. Moreover, India depends on imports to satisfy the vast domestic demand for the precious metal. Gold is seen as something that consumes valuable foreign currency while contributing little to the economy.
There is merit in these arguments. But policymakers erred in treating gold as a consumer good. For the poor and unbanked in India, it is more of a financial asset. About 60% of gold jewelry purchased in India is found in rural areas. This is the preferred avenue for parking your savings. After the harvest, farmers with surplus cash buy gold because they don’t have access to banks. Later, during the planting season, when they need the money most, they can sell the gold or pawn it for small loans.
In recent years, India has made great strides in improving access to bank accounts. But access to credit for the masses is still in the works. Moreover, as the economist Ila Patnaik once pointed out, gold is particularly important in shifting power within poor families to women, as they may possess a liquid financial asset useful as collateral for contracting a ready. Gold, in a sense, is our own traditional way of empowering women and giving them a voice.
The default hedge against inflation
Indians have long invested in gold simply to preserve their wealth. Recurring episodes of high inflation have eroded confidence in paper money, making gold the default hedge against inflation. It is important to note that this distrust of paper money is not just about the rupee.
Since the global financial crisis of 2008, the United States has been printing dollars on a large scale, euphemistically called “quantitative easing”. At the start of the global financial crisis in 2008, the US Federal Reserve had assets worth around $870 billion on its balance sheet. By 2015, it had grown to $4.5 trillion. Today, after the shock of the pandemic triggered another frantic wave of quantitative easing, it stands at $8.8 trillion.
On August 15, 2021, the world marked the fiftieth anniversary of President Richard Nixon’s announcement of the end of the gold standard, which involved converting the dollar into gold at the rate of $35 per troy ounce. With the disappearance of the peg to gold, the dollar has become a fiduciary currency like the others, with no printing limit. Over the next five decades, the price of gold appreciated to $1,800 per ounce, returning CAGR of 8.2%. That’s a very decent rate of return for a 50-year period. Factor in the depreciation of the rupee from Rs 7.5 per dollar to Rs 75 per dollar over this period, and the returns are truly substantial. The faith that ordinary Indians have always had in gold is justified. As for the class of policy makers and economists who claim to be better informed, perhaps it is time for them to change their latitude.
The Gold Ecosystem
The strongest argument for reducing tariffs has to do with what they can do for the economy, mainly through job creation and export promotion. However, for this to happen, we need to shift away from the cash bean around currency outflows in favor of the positive externalities that would likely arise over time. India’s fascination with gold has endured for centuries. The result is that a thriving ecosystem has developed around gold, which provides employment across the value chain to around 4.6 million people with a class of skilled artisans at its heart. In a world where people pay a premium to move away from the uniformity of machine-made products, we can tap into this talent pool to produce handmade jewelry for discerning overseas buyers. That shouldn’t be a big challenge. Once you have policies to encourage and expand the base of the pyramid (of this artisan class), you can grow to be competitive in the export market. But then, as it stands, the hordes of NRIs who visit India every year spend on their favorite food and clothing but shun gold jewelery as our duties and taxes have made it an expensive proposition. By rushing the import of gold and making it unduly expensive, we run the risk of throwing the baby out with the bathwater.
What about the surge in imports?
India’s gold import bill for the calendar year 2021 set a record high of $55.7 billion, compared to $22 billion for 2020. In volume, it stood at 1,050 tonnes of gold. gold, the highest in a decade. Does this negate the case for lower gold tariffs? Not at all.
Every structural reform, and every new resolution that requires a change in attitude, starts with an initial cost. The key is to view currency outflows related to gold imports as an investment for the future. Continue with concerted policy action to ensure that India’s gold ecosystem generates jobs and exports in equal measure. Let’s do this by investing in and building on India’s historic strength – its class of skilled artisans – so that the returns end up far outweighing the costs. What it takes is the foresight to see various pieces fall into place to form a bigger picture, where upfront costs and sacrifices generate substantial value and returns over time. Yes, it’s time to be bold on gold, and that starts with a bold vision.
(VP Nandakumar is MD and CEO of Manappuram Finance Ltd. Opinions are personal.)