India Must Unlock Hidden Capital To Turn The Crisis Into An Opportunity

Many commentators, including this columnist, hoped that the Iran war would last only a few weeks and the disruption of supply chains would be temporary. Now that the Hormuz Strait has been closed for over 10

weeks and there is no immediate end to the energy crisis, the time has come for tightening our belts and focusing on the medium and long-term crisis management. Even if the Gulf shipping is restored immediately, it will take several months, running well into 2027, for the supplies to become normal downstream. The disruption could be prolonged for several more weeks or months. And after the current crisis, we must be prepared for similar disruptions in the future.

Right now, we are facing a mass ive current account deficit in FY27. Imports of oil and gas alone may cost about $230 billion during the current fiscal year, unless the prices ease quickly. On top of it, our inexhaustible appetite for gold is depleting vast foreign exchange reserves. In the last three fiscal years, we imported a total of 2273 MT of gold! This is roughly 25% of the total gold production of the world! We imported a record quantity of 1067 MT of gold in FY21. At current gold prices, the imports of the last 3 years would be valued at $336 billion. Gold is our second largest import after crude oil and gas.

As Paul Romer, the Nobel laureate economist, said, “A crisis is a terrible thing to waste”. We need to convert the crisis into an opportunity for the country. In this column, let me make a humble proposal regarding gold. India has the largest reserves of gold, mostly in private hands. Right from the days of the Roman Empire, utilising the monsoon-driven trade routes, India exported large quantities of luxury goods like spices, pearls, ivory, and fine textiles and ran huge trade surpluses. In turn, India imported vast amounts of gold, silver, and precious stones. Pliny the Elder (AD 23-79) bitterly complained that India drained the Roman Empire of over 100 million sesterces annually because of the Roman appetite for luxury goods. Since then, Indian families and religious institutions have been accumulating gold. It is estimated that Indians probably hoard about 35-40,000 MT of gold, which is nearly 20% of all the gold mined the world over throughout human history! The total value of gold in India at current prices is of the order of $5 trillion! This gold is not meeting the domestic jewellery needs, arising from our cultural propensity, forcing us to import huge quantities every year. Nor are we able to monetise it and convert it into capital to meet our developmental needs—both public and private. Nearly 98% of the gold is in private hands; the RBI's reserves are only about 880 MT. The Gold Monetisation Scheme (GMS) of 2015 could only mobilise 37.81 MT of gold for productive purposes. The Sovereign Gold Bond (SGB) Scheme of 2015 mobilised about `72,000 crore as bonds, and the cumulative subscription of gold is about 147 MT. Now that the gold prices have shot up dramatically, the banks will lose a hefty amount to redeem the pledges under GBS. Can something be done to bring private gold into circulation to meet local consumption demand without having to resort to costly imports? And can this idle capital in the form of a vast reserve of gold be monetised to raise capital for public infrastructure and private investment in productive ventures?

The SGB is clearly risky because the bondholder pays cash and buys virtual gold and receives an interest on the bond amount, with a guarantee of getting the market value of gold on the day the bond matures. On the 147 MT bonds raised, the banks may lose as much as `100,000 crore because of the illconceived scheme.

But perhaps there is a case for a vastly improved GMS. In GMS, the depositor gets a secure interestbearing account for their physical gold, earning a small annual interest. At maturity, the depositor receives gold in cash or gold bars/coins along with the accrued interest. Here the risk to the banks is much less. The deposited gold can, in part, be utilised to meet the domestic market demand for gold consumption without having to deplete precious foreign exchange for gold imports. If properly designed and made sufficiently simple and easy for the depositor, it could attract a significant quantity of gold. But that would be possible only if no questions are asked of private citizens and households, and there is no tax liability for the disclosure of household gold. Safeguards can be provided to ensure that organised crime does not use GMS as a conduit for money laundering or corruption proceeds are not sanitised through the scheme.

If properly designed and implemented, a liberal scheme with safeguards should work like normal banking. Individuals and households deposit their savings in banks, and the money is lent to those in need for interest. The depositor receives interest and can withdraw the deposit when in need. If we can circulate gold in a similar manner and allow redemption of deposits when needed, the import will come down drastically. Even more important, the vast idle capital in the formof gold can be unlocked, monetised, and put into circulation, meeting the capital needs for development and economic growth. The gold deposited will slowly be depleted to meet the consumption needs of the country without resorting to imports. In about a decade, as our economy matures, our dependence on energy imports decreases with green technologies, exports increase, and current account surpluses are generated, we can start importing gold if needed. We need to buy about a decade’s worth of time now.

Clearly, experts in finance, banking, taxation, gold trade, and jewellery should put their heads together and come up with a very carefully thought out, well-designed, and viable scheme, fulfilling the objectives. But a poor country, sitting on a vast reservoir of hidden capital, with an inexhaustible appetite for gold and an immense need for capital to fuel economic growth, cannot afford idle capital of about $5 trillion unutilised. Perhaps this is the time for bold, thoughtful action, duly taking into account our cultural sensitivities and the need to safeguard the interests of banks.

The author is the founder of Lok Satta movement and Foundation for Democratic Reforms. Email: drjploksatta@gmail.com / Twitter@jp_loksatta