For India and Indians, gold has mythological, historical, economic, social and cultural significance. There are references to gold in the ancient Indian scriptures and literature. Gold’s economic significance as a store of value, the financial security it offers, and its easy fungibility or exchangeability with cash are traits well recognised. We have been the world’s second-largest importer and consumer of gold for many years.
Out of the world trade of about 3,200 tons, our annual imports are an estimated 700-900 tons valued at $35-40 billion. Yet, India is hardly the price-setter in the world bullion market, but only a price-taker. Gold prices are determined largely in London and New York markets, and we follow those price trends. Policymakers and experts alike have been talking about making India a price-setter in the global gold market rather than continue as a price-taker. Of course, it is evocative and feels good to talk about it, but in practice, we have done nothing to move ahead.
While a large import volume alone cannot give us much clout globally, this grand vision of becoming a price-setter is achievable if we surmount a few challenges the country’s bullion ecosystem faces. It demands political will and commitment from all stakeholders. Enhancing our price clout in the world market requires several forward-looking initiatives. Large production or consumption alone will not allow a country to become a price-setter.
Derivatives trading volumes alone cannot guarantee a country a place under the sun as a price-setter. Many preconditions have to be met. Countries that are prominent price setters are not only large producers or consumers, importers or exporters, but also are an integral part of the global value chain with unrestricted foreign trade, easy currency remittance facilities, transparent spot markets and high levels of quality assurance.
For India to become a credible price setter, many current challenges or weaknesses need to be addressed.
The key challenges include:
Predictable Policy Environment: A stable, predictable, long-term policy environment is critical. It doesn’t exist today. In Indian policymaking circles, gold is seen as a demerit commodity. Policies, tariffs and customs duties keep changing regularly, creating uncertainty among stakeholders. Transparent Physical Market:
For the yellow metal, the physical market is anything but transparent. Even as the gold jewellery trade becomes increasingly organised, we still have a sizeable unorganised market. Most importantly, policymakers must comprehensively deal with the grey market in order to minimise its role and, if possible, eliminate it. The grey market brings with it a complete lack of transparency in price and purity of goods as well as payments. Its backdoor entry into the market often results in price distortion. No one knows if it is ‘clean money’. Extraordinary measures are necessary to contain the grey market, including stricter surveillance and exemplary punishment for offenders.
In short, the gold market needs a system of end-to-end traceability that, in turn, will enhance transparency and good trading practices, even while boosting the market confidence.
Robust Quality Assurance: This is a key element in the high-value gold jewellery trade. Under-carating is the market’s bane. Strict enforcement of consumer protection law is necessary. Hallmarking infrastructure needs to expand substantially, and certification must be affordable.
Solid and Soft Infrastructure: As important as physical infrastructure like assaying, transport and vaulting, is soft infrastructure, which covers the flow of information, technology infusion and skill development through the training of artisans. Because the market is still largely unorganised, data capture and broadcast are more anecdotal. In the absence of scientifically captured data, speculative elements often enjoy ‘information arbitrage’.
Integral Part of Global Value Chain: Although a large importer and gold jewellery exporter, India cannot claim to be an integral part of the global value chain. There are restrictions on trade. The export of gold bars is not permitted, while import is allowed only through nominated agencies notified by the RBI or the DGFT.
Currency Convertibility: This could be a roadblock for India to become a price setter in the world gold market. Although remittances out of the country have been more liberal in recent years, there are still restrictions. That the rupee is not convertible on the capital account, may be a deterrent.
Regulatory Oversight: Gold faces multiple regulators, and the oversight is scattered among many institutions, including the Ministry of Finance (fiscal matters), Ministry of Commerce (foreign trade policy), Ministry of Consumer Affairs (quality), RBI (financial institutions), and SEBI (derivatives trade). Often a silo approach marks the regulatory oversight. We need much greater coordination and clarity in policymaking and the implementation of rules.
While these are ‘necessary’ conditions for moving ahead, they may not be ‘sufficient’ conditions to achieve the objective. The issue of perception about the country, ease of doing business, confidence of international financial institutions and investors in long-term stability, and sustainability of business will come into play too. It is necessary for the government to take a holistic approach to bring in a robust ecosystem for the bullion business that would at once advance the interests of all stakeholders.
G. Chandrashekhar is an economist, senior journalist and policy commentator specialising in commodity markets. He serves on as Independent Director on corporate boards and as Independent Member of SEBI – CDAC. Views are personal.
