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India and Gold


Transforming Idle Gold Stock into Strategic Forex Asset and Active Capital
S. Gurumurthy*

Introduction: Indian Family Gold stock: The $ 200 Billion Subterranean Reserve Energy of Indian Economy
The background to the present exercise are the challenge of maintaining the growth rate of India and the emerging risks, and possible crisis, on the external front which may threaten domestic growth and put at stake the very idea of rising of India. With the US in unadmitted recession and Europe in unadmitted crisis, and with the cash starved-West itself expressly looking for support from the cash-rich Asia, it will be unwise to hope that Indian economy can draw much sustenance from global economic forces in the near term and it will be wise to realise that it has to look for domestic reserve energies from within to reformulate and drive its growth strategy. Besides the normal challeges of resources for growth, the greatest risks of India today are on the external front, with mounting trade and current account deficits against which the forex reserve stock of India does not inspire much confidence given its sensitive composition that clearly brings out the lack of export surplus based foundations. In short, the drive for India's growth and the means for handling the external sector has to come largely from within, in the short term and even in the medium term. It has to be supplemented by a longterm vision. An effort resembling this nature was made in 1999 when, in the face of global sanctions on Pokharan atomic blast, India appealed to the nationalist sentiments of Non Resident Indians to subscribe its $5 billion India Development Bonds, which was eventually over-subscribed. This inspired great confidence in a nation facing global boycot to face it and to weather it. This also proved that the reserve energies of a nation can also be its patriotic and cultural appeal. The question is whether India has now any such subterranean reserve strength which can power the domestic economy and at the same time supply the much needed support to the external sector. This paper identifies investment gold, as distinct from jewellery, held by Indian households, as the $200 billion hidden reserve energy of the Indian economy, which has the potential to drive the domestic economy and defend the nation against external risks. It postulates that the curse of import cost of gold which imposes 50% of the current account deficit can be handled only by augmenting the stocks, which the very cursed import has brought into India, as strategic national forex asset. This paper discusses the rationale and possibility of how to transform the Indian Family Gold, a potential energy, into kinetic one to achive the objectives of driving internal growth, defending external sector risks, acquiring the power to handle the world gold market by aggregating the Indian demand and building a buffer stock of gold. This paper also suggests the policy formulations to achive the above objectives.

I.

Gold in relation to India an Introduction:

Despite increasing penetration of banking and growth of modern economic instruments like stocks, bonds and derivatives, gold continues to obssess the Indian mind and play a dominant role in Indian household economy. India's relation with gold dates back to 1 of 26

Vedic times. Gold is a cultural asset. It is revered as symbolic of Goddess Lakshmi. At the micro level, it has been and continues to be, even after modern financial assets became very attractive, a most preferred family asset. It is still regarded by most Indians as the best security in times of need. That it constitutes a large part of the savings of Indian families stands to reason. So far gold was only sought after by the buyers. But now gold buying is being deepened and promoted by Akshaya Tritya and Deepavali ad campaigns. Gold is the most striking example of where the micro gold economy at the family level converges and produces macro national gold economy. Its reach impacts on global gold market. It is now the second largest item of import after energy. It represents a tenth of household savings and as an investment option is seven times more preferred than modern stocks. Gold and India: A bird's eye view At the outset, here is a bird's eye view of the Indian gold economy [1]: ! Hoarding gold is an old tradition deeply ingrained in Indian culture and society. ! Traditionally, apart from being an item of consumption in the form of jewellery, high demand for gold stemmed from low penetration of banking facilities, restricted laws of inheritance, hedging against inflation, and being a medium of hiding unaccounted income. ! Gold has also served as a hedge against rupee depreciation, as in the past laws prevented Indian households from investing in foreign assets or holding foreign currencies. ! Also, as the rupee is not fully convertible, gold is one of the limited ways in which Indian households can diversify their currency exposure. ! Over the last few years, gold as an investment option has become increasingly popular. It is perceived as a safe and liquid investment even in the event of global risk aversion and acts as a hedge against rising inflation expectations. ! In fact, the share of net retail investment (comprising individuals' purchases of coins and bars) as a percentage of total Indian gold demand rose to 23% as of the 12 months ended September 2010 from 15% as of the 12 months ended September 2001. ! Gold holdings among Indian households at current market value are about 2.5 times the current equity stock holding of $315 billion. Stock of bank deposits held by households are currently valued at $625 billion, according to our estimates. ! The share of gold in annual household savings which had declined to 5.7% in 2008 is estimated to have again risen back to 9-10 % currently. ! On an annual basis, household savings in gold and bank deposits stood at $29 billion and $104 billion respectively; in equities it was $4 billion as of the four quarters ending September 2010. ! With its high rate of gold consumption, India accounts for 21% of annual global gold demand, while its share of global GDP in terms of nominal dollar GDP is only 2.1% (2009). India's share of global gold demand is about one-and-ahalf times that of China, though its GDP is only about one-fourth of China's. 2 of 26

While gold has special relation to India, it is more at the level of the Indian society and family, not at the government level, while at the global level, particularly in the modern West, gold is more a governmetn asset than a private, family asset. II. Gold and Governments the missing 80%

World's democrats as well as dictators, socialists as also capitalists have been united on issue namely in their hostility to privately-held gold. Whether it were dictators like Mussolini or Hitler or socialists like Lenin or Mao or a democrat like Roosevelt, irrespective of their other irreconcilable differences, they all shared common agenda on gold, namely to nationalise personal gold stocks, prohibit private trade in gold and even confiscate private holdings. They made the governments they headed acquire and stock huge gold. Yet, with all their aggressive effors they could reach and touch only 20% of world's gold stock. And that is all the stock that the governments which once they headed and other governments of the world have today. Yet, thanks to their drive to confiscate, nationalise and socialise gold, the Western central banks have the largest stock of official gold holdings as revealed by the following table.

Governments and gold just a 20% of the gold story Though the table speaks about per capita ownership of gold, it is not the people of those countries who own these gold stocks. These stocks are owned by their governments. So the idea of per capita private ownership of gold owned by governments is itself selfcontadictory, even misleading. It is also misleading on another count. Says Financial Content, a leading provider of market data from which the above data has been extracted: In the world of official gold holdings Europe still sits comfortably on top, mixed together with resource-rich countries. These are the 30 countries with the biggest absolute official gold reserves listed by grams/ounces of gold per capita. The table 3 of 26

above is probably misleading, though. It only accounts for official central bank gold holdings which are estimated to be around 20% of total gold above ground. Even this figure is not undisputed. French investment house Cheuvreux suspected in 2006 (pdf) that central banks have secretly sold off or leased 10,000 to 15,000 tons, effectively halving their reserves. People in India, China and non-Western world and gold: the missing 80% story The Financial Content asks Who Holds The Other 80%? and answers thus: This question can never be answered correctly and leaves room for wide guesstimates. As gold never lost its value it can be presumed that most of it is still stashed away in the form of jewellery. After gold ETFs [Exchange Traded Funds] Indian housewives may be a large investor as a group as are Arabic countries, remembering that India alone sucked up most of the gold sold under the Central Bank Gold Sales Agreement in this decade. In general it can be surmised that the less developed a country is financially, the higher private gold holdings will be in the absence of other options to save. Just ask 1 billion Indians. China is another blank spot on the global gold holdings map. The Chinese government has been actively touting gold and silver investments on TV while gobbling up almost the entire production of the world's biggest gold producer it has become in the last decade.Western private households are probably at the bottom of the list of gold holders, having been driven into paper investments in the past 25 years. It is believed that the Western world holds only less than 3% of its assets in gold. This allocation percentage could mushroom as all other markets turn south while gold continues to climb the wall of worry. [1] Household gold in non-West a mystery unrevealed What the Financial Contents conveys is clear enough. While the Western governments have large gold stocks that is only part of the 20% story of global gold stocks; the balance 80% is owned by households particularly in India, China and elsewhere. The households in the West have more of financial investments in their portfolio and less of gold. It is also cleat that no proper data on gold holdings of households and private parties in the world is available. The real clue to understanding the potential, unexplored, and unexploited role of gold lies in understanding the fact that the data of official gold holdings is just 20% of the story and the 80% balance is missing in the gold statistics. Unless that is properly uncovered and revealed the understanding about gold and it role, the story will remain incomplete. III. Gold as India's foe for 40 years:

Gold up by 7 times, Stocks stagnant The fundamental conflict in gold economics in India is that India does not produce gold but the people of India are obsessed with it, in fact revere it. This conflict has caused endless confusion in the Indian establishment whether it was state-directed then or post-reform now. Gold, discounted and derided as idle asset, seems to challenge all theories of modern economics that tended to undermine it. Look a the facts. Gold price 4 of 26

has risen seven-fold since 2000.[3] It is at its so far highest now; yet it is relentlessly moving up. In contrast stock markets are sliding; and over a band of a decade, they have virtually not grown in developed nations. Dow Jones index today show a gain of 2.6% over the year 2000.[4] Purely on economic logic, people should be moving away from gold and into stocks. Yet they did not. It is not a short term distortion. Gold has outperformed the most popular modern financial instruments over the last decade. India's unending, ever rising gold pursuit But, in contrast, the Indian apetitie for gold does not seem to have peaked, but rising still. In 2010, India imported 958 tons of gold [5], when the average gold price was $1390 per troy ounce.[6] For the year 2011 import is expected to top 1000 tons [7] when the gold price has shot up to $ 1674 per troy ounce.[8] That the over the ground gold stock is 165600 tons and the undergound discovered gold stock is 26000 tons representing just 14 year's gold production at 2005 levels [9] is reason enough hoard gold. But that reason has always existed, but the gold purchase has exponentially gone up, particularly in recent times. So that gold stocks are likely to deplete is not the main reason why the gold purchase has gone up. Gold a cause of India's external sector concern India is now facing the prospect of serious external economic crisis because of its widening trade deficit from $120 billion to $145 billion [10] forcing current account deficit of over $54 billions on the nation for the year 2011-12. [11] Saumitra Chaudhuri, Member, Planning Commission told the Financial Markets Conclave 2011 organised by CII on December 17, 2011, that Indian gold import has increased in 2011 since the previous year by $15-20 billion [12]. Half of India's current account deficit is entirely accounted for by gold, which is the second biggest import after oil. So gold is seen as the main source of the economic crisis threatening India. Are Indias weddings destroying its economy? ask foreign media. [13] They say that Indian marriages, for which most of the gold is imported, are doing down the Indian economy. Gold integral to India's cultural heritage: a historical view But, those who talk about and against the Indian propensity to hoard gold miss the fact that it is actually integral Asian cultural heritage and sense of state power. Gold figures in Vedas the most ancient literature in the world.[14] Angus Maddison study has established that India was a thriving and leading global economy for most part of the two millennia, till almost CE 1800.[15] India's had been a continuous story of economic success, within and outside. India had established export-driven economy since ancient times. As early as, in the third century, Roman Egypt used to spend gigantic sums on imports of exotic goods from India, resulting in annual drain of 55 million sesterces [equal to $3.25 in gold terms] [16] meaning that India ran an annual trade surplus of $178.25 million in current terms[17]. Marco Polo writes in his travelogue in CE 1271 that India [which produced very little gold] had such plenty of gold that the exchange ratio of gold to silver was 1:6 and India had imported large amounts of gold and silver in 1500s and 1600s in exchange for cotton. [18] This continued as late as in Akbar's time when India had had a thriving export driven economy. According to the Bank for International Settlements (Annual Report, 1934-35), gold absorption in India between 1493 and 1930 was at least 14% of world production [19] 5 of 26

The Indian government, not being conscious of the Indian cultural pull which made gold more than an asset and investment, handled it like the US government did in 1930s, when it not only banned private gold but also viritually nationalised it. The Indian moralist dislike for gold in 1960s, the socialist detest for the yellow metal of 1970s and 1980s and the free market efforts to show its place as uneconomic investment have all failed to handle gold. It has been proved, even at the global level that stocks could, at times, beat gold as an economic asset; but gold comes back and beats stocks repeatedly. The reason is that stocks are not worshipped; they do not adorn ordinary women; they do not give the ordinary Indian famlies the security that they see in gold. Incidentally 70% of India's gold demand comes from rural areas. [20] According to Eily Ong, Investment Research Manager, WGC, India is the largest gold market in the world and as such, the likely recovery of local gold demand to pre-crisis levels is of considerable strategic importance to the wider gold market. Gold is an integral part of Indian society and a foundation of wealth and savings in India. [21] Free India's tussle with gold The moralist view of gold in India has been that Indian love for gold which is cultural and historic is ostentatious; the socialist view has been that it is a class asset and the free market view has been that it is an economic anachronism. Indian government's relation with gold had been hostile since 1947 when gold imports were banned. [21] Gold Control Order 1963 banned production gold jewellery of more than 14 carat fitness.[22] By the next year and through the Gold Control Act 1968 government control over domestic gold transactions was more or less complete.[22] In 1990, Gold control regime was withdrawn.[24] For 43 years from 1947 till 1990, thanks to Indian State's hostility to the yellow metal, all trade in gold was handed over to Haji Mastan and Dawood Ibrahims. Result, even the gold which Lord Balaji wore and got in His Hundi till 1990 has been obtained through their enterprise. It is only from 1990 that the Indian government's relation with gold turned partially friendly.[25] This resulted in huge and ever increasing and open import of gold, which was hitherto being smuggled into the country. While socialist approach was to consider gold as foe and ban, control, socialist and seize it, the free market approach was to make it less valuable and less attractive as an investment by liberalizing stock market. Gold its penetration and power in modern Indian economy But, contrary to the economic theories and theorists, in the economic reform period when modern economic instruments were theoried to drive the traditional gold out of reckoning, the modern theories proved wrong and gold beat the stock market hallow. It has performed better than sensex in the last twenty years. In 2000 the International gold price was $271 per troy ounce; [25] the average so far in 2011 is $1684 per troy ounce [26] rise of 610%; stocks [Dow Jones] rose by just 2.6% in this period. [27] Indian stocks rose by 214%. [28] Look at it from the Indian families' particularly Indian housewives' perspective. They have proved better fund managers. See what their persistence with gold has done to India. It is estimated that Indian gold holdings range between 18000 tons [29] according to Macquarie study to 40000 tons [30] according to a 1996 study by International Centre 6 of 26

for Peace and Development [OCPD] as increased by gold imports since 1996. Most of the gold stocks is in the hands of Indian families. At 18000 tons the current value of gold in India is almost one trillion Dollars [US] 50% of India's GDP. At 40000 tons it is over $2.3 trillions in excess of India's GDP. This proves that the traditional Indian families have been the wisest investors. So Gold is undisputedly the pride and friend of Indian families; and equally it largely remains the foe of Indian policy makers. IV. Gold now emerging in India as a preferred investment asset not just as Jewellery; India has gold in investment form [besides jewellery] valued at $200 billions at the minimum and $460 billion at the maximum Gold, which was dominantly used for jewellery but not so insignificantly kept as investment in India, has, of late, emerged as preferred investment asset held in the form of bars and biscuits. This is not only due to economic variables like the instability in financial and stock markets, but also due to cultural pull of gold specific to India and generally to Asia. During the reform period from 1997 to [Q3] 2011 India has imported 10600 tons of gold. Gradually, in recent times the share of gold as investment has risen, and the trend continues. In 2008, share of gold as investment in the total demand was estimated at 28%, 210 tons; [32] ] It went up investment up by 25 per cent to 34% of the total demand to 220 tonnes approximately during 2009. [33] It soared by 83 per cent in 2010 from the year earlier to 349 tonnes in 2010, accounting for 34% of the total demand [34] In 2011, overall jewelry demand during the first nine months of this year fell to 464.4 metric tons from 471.9 tons a year earlier, but, investment demand grew nearly 26% year on year to 296 tons, according to the World Gold Council.[35] In recent times, there has been fall in demand for gold for jwellery but it is compensated a huge rise in investment in gold.[36]. The message is clear. Gold buying has not reduced; but there has been a shift from ornamental gold to gold as investment. The aggregate gold added to gold in investment for the years 2008 to Q3 2011 45 months period amounted to 1073 tons. One may safely assume that the share of investment gold [namely gold not turned into jewellery form] has always been between 20% and 25% in the past, but the proportion of investment gold relative to jewellery has risen sharply in the last few years. Assuming conservatively that an average of 20% of the gold is held as investment in India, the gold in non-jewelry form lies somewhere between 3800 tons on the lower side and 8000 tons on the high side, depending on whether the Macqarie study is right or that of the International Centre for Peace and Development. Taking the current international value of $57.6 million per ton of gold, the value of investment gold in India is between $ 207.4 billion on the lower side and 460.8 billion, on the high side. V. Gold in US and in India a study in contrast

A comparison of the role of gold in US and the policy on gold in US is very instructive of how state possession of gold makes a world of difference to a nation. As important is the story how, by state possession of gold by dispossessing the people of their gold, the 7 of 26

US Dollar got into gold as global escalator, became a global currency and eventually became more valuable than gold itself at a point. Gold as 'barbaric relic' and Dollar as superior to gold US Dollar became world currency because it was made equal to gold under the Bretonwoods architecture. That was because the US had official gold stock of over 20000 tons in the post war period with which it had backed the Dollar. But, in 1971, President Nixon withdrew the backing of gold for the Dollar. But by that time the world had stocked so much Dollar and Petro Dollars began flowing into the US, the Dollar had become the defacto global currency. Later, as Rober Tiffin, a Belgian American economist had noticed as early as in 1960 itself, the Dollar became more valuable than gold itself [37], namely Dollar as the super gold superior to gold. But with the global meltdown gold has become so valuable that today the gold prices of $1600 per troy ounce have gone up by over 35 times as compared to the gold prices of $35 per troy ounce in 1971. Meanwhile, the Dollar, which had gold as the crutch, became a valuable asset, independent of the gold, and became, as George Tiffin said, ever more valuable than gold. But the US could not have achieved it but for the gold stocks it had had in 1950. Indian people have more gold, when the gold price is 45 times more than it was in 1971, than the US government perhaps have ever had. The public gold in US made the Dollar a world currency. It was on the basis of the US gold stocks the Breton Woods regime was brought into existence despite the fact that the influential economist John Maynard Keynes who headed the team of economists who formulated the Breten Woods idea, referred to gold as barbari relic.[38] Public gold in US vs Private gold in India But the private gold in India, whose stock is more than the US stock of gold, has been a drain on Indian currency. Compare US and India and the role of Gold in both. ! ! In India gold is largely private, family asset. In US it is public, government asset. In 1933, US nationalised gold and banned private gold investment, which was revoked in 1976. [39] India did not nationalise gold, but had banned private investment in gold between 1968 to 1990. US produces some 240 tons of gold [40]; India produces some 2 tons. [41] India is the largest importer of gold in the world. US is a net exporter of gold [42]. Post-war US had official gold stock of 22000 tons;[43] now 8133 tons [44]. India has a mere 558 tons.[45] But, according to Macquarie, the Indian people are estimated to have 18000 tons of gold valued at $950 billions equal to 50% of India's GDP. There is another estimate, by International Centre for Peace and Development, in June 1997 which says that at that time India had an estimated 29000 tons of 8 of 26

! ! !

Gold. After that India has imported another 10800 tons till the third quarter of 2011[46] making it almost close to 40000 tons which is more than the GDP of India. The public possession of gold by US enabled US to make the US Dollar global currency and to make it more valuable than gold, but possession of gold by Indian families is achiving the very reverse, namely, weakening, instead of strengthening, the Indian Rupee Gold made US Dollar more valuable than itself The contrast is clear. If the US did not have the huge gold stock in its treasury, the Dollar would never have attained its prominence during 1950s and 1960s. By that time, 40% of the USD printed in US began circulating and getting stocked outside US [47] having been accepted because of its convertibility into gold as being equal to gold itself, but with return which gold does not yield. When the US eventually stopped converting the US Dollar into gold, the USD depreciated, within couple of years, in terms of gold from $35 per troy ounce to as much as $195 per troy ounce [48] that is to merely 1/6 of its 1970 value in terms of gold. Today the USD's value in terms of its gold-indexed value is about 2% of its value. Yet, in trade terms the USD has become more valuable than the USD. Now over 2/3 of the Dollars printed in US is stocked outside.[49] The Dollar first got on to the gold escalator and became a global currency; and soon, it dropped gold and on the back of modern economic theories and financial instruments, it replaced gold and became more valuable than gold [50] But today it is the very course and the consequent compulsion of global trade which needs a global currency that continues the Dollar, which has penetrated 2/3 of the global financial order, as the global medium of exchange. Transfer 3000 tons of gold from private hands to RBI India's forex will be $480 billions Now assume that out of the gold stock held as investment in India which ranges between 3800 tons and 8000 tons some 3000 tons of gold stock is in the hands of the government, namely the RBI, it would mean that India will have forex assets worth $172.8 billion. Adding the current forex reserves of $306.77 billion, the total forex reserves of India would be $479.5 billion. More important, the quality of forex reserve would improve vastly, because the present forex reserves is largely represented by FII investment in stock market and NRI deposit in banks these two account for over $200 billions, two-thirds of the total reserve. [51] It will at once stabilise the external economy; reverse the declining confidence and boost growth. VI. The current situation in India huge risk looming on the external front The current situation in India presents a dichotomy. The Indian domestic market seems well-placed despite all the issues of the global and national economies. But the threat comes from outside. The external side the Indian economy is weak and getting weaker, almost threatening an external sector-driven slow down, if not crisis, in the national economy of the type and quality witnessed in 1990. Indian economy is largely 9 of 26

domestically driven. Domestic demand drives the National economy. Domestic savings drives the national investment. The country escaped the impact of global financial crisis only becaues it was domestically driven. Even now its strength is founded on its domestic drives India's excessive realiance on imported essentials energy and other inputs into the economy and its inability to generate adequate export surplus has weakened the extenal sector. Added to that is the weak composition of the forex reserves with 2/3 of the reserves represented by unstable inflow. This has subjected Indian rupee value to the external inflow and outflow of mostly hot money over which the Indian government has no control and which depends on global financial sentiments. High inflow of hot money inflated India's forex reserves India had had the problem of high inflow of hot money in 2007 and 2008 and to contain appreciation in Rupee value the RBI had had to mop up $ 66.213 billions in 2007 alone [52] to ensure that the Rupee value did not appreciate because of the hot money inflow particularly in the year 2007, and thus build up quick additional forex reserves of $ 66.213 billions in the year 2007 alone [Ibid], though it sold a fifth of it, $ 12.169 billions, in 2008. The forex reserves till March 2006 was $151.6 billions; in March 2007 was $199.2 billions and in March 2008 was $309.7 billion[53] Most of this rise was attributable to hot money which will enter and exit at will. That distorted forex management But this distorted the Indian forex management forcing the country to adopt a forex policy regime that encouraged the outflow of the forex acquired through hotmoney inflow. This is because the net cost of carrying the forex was very high. The income earned on forex reserves is meagre. For example on the average forex reserve of Rs 13.66 lakh crores between July 2010 [Rs 13.20 Lakh crores to June 2011 [Rs 14.12 lakh crores] [54] the RBI earned an income of Rs 21150 [55] This works out to a little more than 1.5% which is way below the Bank Rate of 6% and Repo rate of 8%. This is important in the context of the theme of this paper about the strategic handling of gold as equivalent and substitute for gold. So the carrying cost of forex reserve, arrived at on the basis of the Bank Rate and Repo Rate, is more than four to five times the income received on the forex reserve by the RBI. Current concerns falling inflow, balooning current account deficit So the fact is that while the carrying cost of the forex reserve is so high, what the RBI carries as forex stock is largely represented by hot money stock. Out of the total forex stock of over $300 billions, almost half is accounted for by Portfolio investments; and if the NRI and short term debts are also taken into account, almost 80% of the reserves are highly sensitive. Added to this is the huge trade deficit. The annual trade deficit was around $100 billions last fiscal year, may rise to $155-160 billion in the current fiscal and the current account deficit may widen to $54 billion [56]. The hotmoney flow respresented by portfolio investment has virtually dried to $922 millions in H1 of 201112 from $26.826 billion H1 last year. Even in November and December 2011 FII inflows still remain negative [57] as compared to the record inflows of $ 32.376 billion in 2010-11 and $ 31.471 billion in 2009-10. With the forex reserve so sensitive, there is a huge risk on the external front which calls for bold and innovative response other 10 of 26

than traditional responses of tightening of import and forex liberalisations which also seem inevitable. VII. With Gold again threatening to become anchor of world's financial order, a Gold-friendly India as an alternative idea Gold has been the foe of the moralists, economic thinkers and also the government, who all characterised gold as anachronistic and love of gold as backward and neanderthal mindset. Now foreign media even says that Indian marriages are destroying the Indian economy. It is understandable for them to expound ideas that based on their world view and economic thinking based on such world view. Modern economic theories which had made the financial instrument more valuable than gold for almost three decades from 1970 to 2000 almost proved the western economists right. But, soon, in the subterranean and open battle between economists and government on the one side and gold on the other, the former has lost out and the gold has won hands down in India and because of India even at the global level. The battle however continues theoretically and at the thought level, even though, on the ground, the war has been won by gold. The victory of gold over modern economists and their economic theories is being gradully recognised and proclaimed in the West. Global rethink on gold gold seen as reference point for financial stability; China accumulates gold In an artile titled Return of the Gold Standard as world order unravels, The Telegraph UK wrote on 14 July 2011: World Bank chief Robert Zoellick said it was time to "consider employing gold as an international reference point." The Swiss parliament is to hold hearings on a parallel "Gold Franc". Utah has recognised gold as legal tender for tax payments. The Telegraph observed that as the twin pillars of international monetary system namely US Dollar and Euro threaten to come tumbling down in unison, gold has reclaimed its ancient status as the anchor of stability. The spot price surged to an all-time high of $1,594 an ounce in London. The Telegraph went on to say how different countries are seeking alternative instruments to park their forex reserves with particular reference to China. The newspaper says, China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54bn. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes. [58]. Recently, on December 2011, Oliver Bush, Kate Ferrant, and Mischelle Wright, economists of Bank of England authored a paper [Financial Stability Paper No 13] in which, when advocating a rule based monetary and financial system, they wrote: Overall, the evidence is that todays system has performed poorly ... at least compared with the Bretton Woods System [59] Need for bold rethinking on gold in India So even the modern economic thinkers including the head of the modern economic think tank, the IMF, are seeking to have a relook at gold and be-friend gold. What about India and Indian economic thinkers? There appears to be no indepth, innovative and bold thinking about gold in the Indian 11 of 26

economic and intellectual establishment and its undeniable role in Indian psyche, culture and economy. The Indian economists [who are largely drawn from elite group] government and the rest are clueless as to how to handle gold, which is invading India like a Tsunami and, despite being forex in itself, gold is eroding India's forex base and is pushing up the world gold prices from one peak to the other to the disadvantage of India. They are counfounded by the fact that even economists who regarded gold as a retrogate and unprofitable investment and make policies againt it are unable to prevent their own family from buying and stocking gold instead of shares and other financial instruments. Now let us see whether Indian establishment can rethink on gold and establish a friendly relation with Gold. How India mostly, China partly, inflate global gold prices First, let us grasp how does the Indian demand for gold question the modern economic theories and financial instruments? When value creation is the very soul of modern economics the value of gold has made the West to sit up and take note of its effect on the rest of the value creation process in the world economy. The demand and the price of gold actually set the bench mark for even assets like oil; the rise of gold has made it an assertive alternative for stocks and other financial instrument. With gold prices cealessly rising without any end in sight, there is a mad rush even at the global level to buy gold futures and derivatives which again adds to the escalation in gold prices. But the rise in the price of gold is not because of any great underlying demand for gold in the West. It is essentially because of the huge demand for gold in and from China and India. India and China propped up global gold demand to near-record level of $44.5 billion in the second quarter of the calendar year 2011 in an otherwise tepid market, but the precious metal is poised for a huge leg-up in the current quarter through September due to a fresh surge in investors interest in haven assets following a financial crisis in major economies, according to the World Gold Council.[60] The two aspects to which attention is drawn namely, one, the demand for gold from India and China in that order and, two, the financial crisis in major economies, which means crisis not just in modern economies but in modern economics as well are important. [61] Need for lateral thinking, need to ask unconventional questions So, time has come for India to develop lateral thinking and ask unconventional questions about gold and its own handling of the yellow metal. It needs to do a reaudit of the economic theories that have tumbled out of the economic laboratories of the West which are seriously questioned in the West itself. Indian thinkers cannot disagree that the rise in gold prices now is not because gold is in short supply, which it always was. They will not also dispute that it is happening because and that it would never happen without the undeniable underlying demand for gold in and from India particularly, which creates pressure on supply and price of gold. Ask the question in another way: why is the global gold price going up despite the all round signs of recession everywhere? Why income yielding securities and stocks, regarded as superior to the idle asset gold, are stagnating, stuggling and even depreciating? How influential economic thinkers like John Maynard Keynes who called gold as barbaric relic and Robert Tiffin who saw Dollar more valuable than gold 12 of 26

were proved wrong by gold? The so-called idle asset, gold, is leaping from one peak to the other. The reason is in one word: Indian Demand. If Indian households do not buy gold like they do, the world gold prices will collapse. What makes gold valuable, for that matter anything valuable? It is the relatively high demand for gold as compared to its supply. So India's gold demand is the jackpot of the world gold trade and of those including government which possess gold. The converse of it is that India's gold demand that betrays the Indian obssession with the yellow metal, is India's economic distress. But can the Indian obsession for gold be turned into India's strategic advantage? Yes, if we can ask ourselves the following question. What will happen to world gold prices if India halves its import of gold; or if India decides not to import gold in any single year? Will the gold prices hold? Will it not crash? Obviously they will. India needs to develop strategic-buffer stock of gold to control global gold prices It means that if India can find an innovative and bold way to handle its gold demand it can not only tame but also control the world prices. It can tame and control because it makes demands and imports a fourth of the world demand for gold, but does not use its power to tame or control the world gold market of the prices in the market. This is because the Indian government or the Reserve Bank of India does not have adequate buffer stock of gold to stop or defer the import of gold from the global market. The moment India can and does built a buffer stock of gold, which will enable it to defer or delay imports and yet meet the national demand, it can control the global gold market as the biggest buyer. And if it can cartelise with China, which will mean control of more than half of the world demand, then the gold game will be in the hands of the two. With China keen on exchanging gold for US Dollar and India too is keen about substituting gold for the Dollar, there cannot be any conflict of interest to cartelise their demand. Indian government needs to pursue gold-friendly policies This calls for a change of perception actually a U-turn on gold from a gold-hostile mindset to gold-friendly psyche. How can that U-turn occur? With the perception that gold is a foe of India becoming an impractical foundation for a realistic and appropriate gold policy formulation, the question that arises is whether gold can at all be and become a friend of India and the Indian economy. The first point to note here is when the people of India the rich and the poor alike consider gold as a friend and stock it and for the poor it is actually the anchor of their life, for the Indian economists and thinkers to consider gold as an semi-barbaric asset or as an economic anachronism that the modern economic theories will erode away, makes them mismatch for the people of India. If, on a change of perception, the policy makers and the government come to view the demand of the people of India for gold as an asset rather than a liability, then the answer to the question whether India can befriend gold is easy. This takes us to the next question. VIII. Can the Indian gold demand become the strategic advantate of India? Gold obssession has made Indian households richer in trillions Gold is largely a strategic asset all over the developed world. It was nationalised in 13 of 26

America in 1933 on the premise that it was a strategic asset. The total amount of gold held as private investment world over is just 1750 tons. [62] In contrast, Gold in India is largely a personal, family asset. Indian familes have accumulated a minimum of 18000 and maximum of 40000 tons of gold. Out of this, gold as investment is estimated at 3800 to 8000 tons, which is many times the gold held as investment the world over. Share of gold in Indian household savings which was 5.5% in 2005 and remained in the range of 6.25%-6.5% during 2006-09, sharply rose to 11.5% in 2010 [63] making gold an unparalleled phenomenon in Indian. But in India gold is a peronal asset of the people, not a strategic asset of the nation. India, which produces hardly couple of tons of gold, consumers almost a quarter of global gold produced. Nowhere in the world do the common people buy gold as much as Indians do. With 70% of the Indian gold demand is from rural areas, which shows the strength of gold as mass and common man's asset. Result. Today the people of India, whose gold possession is estimated between $1 trillion to $2.5 trillion are richer than the government. More, they have an internationally tradeable convertible forex asset at home, which has enabled them to beat inflation which modern financial instruments have not be able to do as well. Even the government, which bought 200 tons of gold couple of years ago, finds that that was among its most intelligent decisions. When it purchased 200 tons of gold in November 2009, it paid $6.7 billion; today, at $57.6 million per ton, in less than 14 months of the purchase, the value of the same gold is $ 11.52 billion an appreciation of 72%! Need to transform valuable personal asset into invaluable strategic national asset With huge stocks of gold with its people what India lacks is strategic stock of gold. Imagine India has a strategic gold stock of 3000 to 5000 tons. The global gold market will dance to India's tunes. With this strategic buffer stock India can effectively aggregate and use its huge national power of gold demand to its advantage; it can also cartelise with China. If it builds strategic stock of gold and has the potential to supply and supply gold at global prices to its own people, then the world will have short term gold glut; which will instantly lead to fall in gold prices to its advantage. India can thus force down the gold prices. It can then strategically buy and then stock more gold. The gold game could be played by India, because Indian people buy huge amount of gold annually. This cannot be played by most western countries, because their people do not buy appreciable quantity gold at all. If India build adequate strategic gold stock and Indian gold could be securitised, transacted and integrated into India's functioning economic architecture and not allowed to remain isolated and quarrantined as at present, India's propensity to consume gold and the gold demand of India could as well become a strategic advantage for India. Looked at another way, India has to influence world gold prices, in its own interest as it is the worlds largest buyer of gold. India has to keep importing gold. It cannot stop it. No government in India can ban import of gold or nationalise gold stock in India. Therefore, India cannot afford to continue to be a spectator of the world gold market. It has to become a player, and an effective player. And it has to influence the world gold market as an effective player, and world gold prices only by leveraging on its buying power and also by building strategic stock of gold. India cannot emerge as a player in global gold market unless it builds a strategic stock of gold. An India, with strategic stock of gold can be an effective player and inflence the global gold market, even 14 of 26

cartelise buying with China based on its buying power and play the global gold game. Far from being a player, today India is a spectator, even a victim, of global gold game. QED: India has to be build adequate strategic gold stock to take advantage of its own gold buying power. If India builds strategic gold stock, it can coverge with China on gold It is now necessary to compare China and India, two huge consumers of gold. China is the top gold producer and number two in gold consumption after India, but India produces virtually no gold. China needs to import of gold for both domestic consumption as well as for building gold reserves as it has become highly dependent on US Dollar on maintaining its forex reserves exceeding $2.2 trillion. China's private gold buying is increasing exponentially in recent times. China deregulated gold in 2008. Chinese households, according to Chinese Administration of Foreign Exchange [SAFE] had a stock of 3000 tons as gold investment, of which 2/3 was acquired in the five years between 2004 and 2009 and this 1890 tons was four times the acquisition by SAFE! Chinese gold buying is likely to double in the next 10 years. [64] China is also a huge producer of gold. Chinese gold produced 224 tons of gold in 2005 and stood no 4 in gold production. With other countries's share declining, China emerged as the top producer of gold in 2007 and remains so with its production in 2009 reaching a high of 320 tons. [65] China Daily says that in 2010 China's gold production reached 341 tons; but most of the Chinese production of gold goes into reserves ; it also says that the Chinese reserve figures are probably more than released. It says that Chinese gold reserve would/should reach at least 5000 tons. [66] . But like in India most of Chinese gold buying 78% is for jewellery; 18% for investment; 4% for industrial uses [67] So China and India have a convergence of interest in cartelising gold buying. But for Chinese have a natural strategic advantage its domestic production of gold is over 340 tons; India has to acquire a substantial strategic stock of gold. Unless India acquires sizeable strategic gold stock it cannot have convergence with China. Unless India and China converge as buyers of gold in the world market, they cannot infleunce the global gold market, demand, prices or production. IX. How Can the Indian State acquire strategic stock of gold? And from where? Yes the Indian State can build buffer stock of 3000 to 5000 tons of gold. Indian financial system can and should build a stratetic buffer stock of 3000 to 5000 tons of India without importing or buying gold. With gold in coins and bars, that is held as investment estimated to range between 3800 tons [valued at $200 billions] and 8000 tons [valued at $460 billions] that is ready made procurement area to build buffer stock for the country. India needs to secure private gold as strategic stock, by consent But this gold stock is in the hands of the people of India. This has been acquired and kept, by whosoever has imported them, with a view to stock them partly for appreciation and partly for sale. Also gold being an important avenue of investing black money, there has been extensive accretion to the stock of gold in India. If this stock 15 of 26

comes into the hands of the State, it will be the buffer stock of the country. The Western dictators and democrats, and socialist and capitalist rulers forcibly acquired or confiscated it from the people and made it strategic state asset. But confiscation and forcible acquisition are now anachronistic and cannot be repeated in even in the West. India, gold having more cultural and religious value than mere economic, even at the height of gold control regime, such course of action could not be contemplated. How then can the Indian state acquire the stocks of gold held as investment by private parties. The first understanding needed is that most of the gold stocks held by Indians as investment represents investment of black or illgotten money. Also most of the gold held by Indians is unreported and undeclared gold. [68] It is openly declared and admitted that the authorties do not have any estimate of the illegal, black trade in gold [69]. Any way 70% of the gold stock in India is held by rural Indians. That most of the gold holdings of private parties also represents illegal money on which tax has not been paid. This is a reality which has to be kept in mind in any effort to get the gold transferred from the private holders to the State. Let us now examine what should be the specifics of the scheme to persuade those who hold what would be a highly strategic asset in the State's hands, to part with it. The only way it is doable is by their consent. And by their willingness to part with under a scheme in which they see that they do not lose, instead gain and they are not exposed to any risk. The main features of the scheme are explained here. The scheme suggested is explained here in details hereunder: The Gold Deposit Scheme The Gold Deposit Scheme is a comprehensive scheme which touches upon policy of import of gold by canalisation, stocking and sale of gold by designated, well-spread, bank branches, at globally competitive rates in India and provides immunity from gold control regulations for the depositors and also from taxation for the gold deposited into the bank. The essential ingradients of the scheme First the scheme must provide that if the depositors part with their gold now, they will get it back as gold. So it has to be a time-bound gold deposit scheme in banks under State Guarantee which assures that when the deposit matures equal quantity of gold would be returned to the depositor. In substance it means that the depositors have only lent gold under government guranteed scheme. Second, since the purpose of mobilising the deposit is to augment strategic-buffer stock of gold with the Reserve Bank, the gold deposited into the banks should be acquired by the RBI under appropriate policy to be formulated and against bonds to be issued by RBI carrying adequate interest so that the banks get return on the Bonds to pay off interest on gold deposits as well as turn the bonds into liquid resources for deplyment for development purposes. Third, to enable the banks to operate the gold deposit scheme, the banks must allowed 16 of 26

to buy and sell gold in national and global markets under appropriate import policy to be devised. The policy must also provide that the banks may look to the RBI as the lender of last resort in respect of their gold deposit liabilities also. The RBI may also devise policies to sell gold back to the banks when they need for meeting their obligations. Fourth, the depositors must get some return if they deposited the gold in banks; so that they find advantage in parting with the gold for a while to get income on an asset which is otherwise idle. Fifth, it must be transferable security so that they may use it as collateral or for sale. This will make the gold certificate equal to gold. This will facilitate easy marketability of gold in spot market. The delivery of gold deposit certificates should be regarded as equal to delivery of gold. Sixth, and the most important point, there must be complete tax immunity if the holders of gold came forward to make the deposit and the depositors ought not to be asked where did they get the gold from. Keeping these essential limbs in mind, the following gold deposit scheme is suggested for consideration Canalise gold imports, make gold available through banks at globally competitive rates in India Gold imports would be canalised through nationalised banks which will import gold and sell it at CIF rates plus such percentage that gold becomes available to Indians in India at globally competitive rates. No other persons would be entitled to import gold. This will mean that the Indian gold demand,which is now highly diffused, can be aggregated and cartelised through the banking system. This will enable the banks acquire skills to deal in gold and to enter into regular contracts for buying and selling gold as part of their banking business, subject of course to the restrictions and guidelines prescribed under the scheme. Nationalised banks to operate gold deposit accounts All nationalised banks shall be allowed to accept deposits of gold, through their designated gold branches which shall have assaying facility, from any Indian citizen under KYC norms. Gold deposits to bear interest The deposits may bear interest for at, say, 1% interest on the market value of gold on the date of the deposit for 3-year deposits; at, say, 2.0% interest for 6-year deposit, say 2.5% for 9-year deposit and, say, 3.0% for a 12 year deposit. The return of the deposited gold should be guaranteed by the government of India and the gold stocks of the RBI must be pledged to support the return of the deposited gold, in case of default by banks. Depositor not to be asked the source of gold

17 of 26

The scheme must provide that no depositor would be asked to explain the sources of the acquisition of the gold or the sources of his investment in gold. RBI to buy 90% of the gold under deposit, gold value becomes domestic capital The banks will sell subject to such conditions as the RBI may impose and over the specified period, 90% the gold which they have acquired as deposit to the RBI and they will be paid by the RBI in the form of bonds carrying 6% interest or more as the RBI may decide. These bonds should be reckoned as part of the cash reserve of banks. By this process the RBI will be acquiring gold in return for its bonds with the banks. The interest yielded on the bonds the banks will not only fund the interest payment on the deposit but also enter into adequate forward cover for the deposit. The banks will also be able to add to their investible resources. This will add to investible domestic capital. The effect of the Scheme Gold with people becomes forex reserve One, the gold with the people becomes the forex reserves of India. This will enable the forex reserves to be stable and will strengthen the Indian Rupee which is weak because of the sensitive nature of the forex reserves of India. Gold so bought becomes strategic reserve Two, the gold also becomes the strategic gold reserves of India, which will enable India to use gold both as forex stock as well as supply merchandise at home. It also becomes the buffer stock for domestic supplies Three, it also becomes the buffer stock of gold for the country with which it can handle the global gold market and the supply and price fixation in the market. Idle asset becomes active capital Four, the value of the gold which is idle savings becomes actual, usable savings by the RBI issuing bonds on the basis of which the banks will be able to release credit to the system and also raise credit for deployment; Gold gets securitised Five, the gold deposit certificates, which are equal to gold, becomes securitised which the depositor can use as collateral for drawing credit from the bank or from the market. He can also sell the deposit certificates as equal to gold. Releases liquidity into the system Six, as the gold gathered under the scheme would sold to the RBI after the Banks keep reserve stocks of 10% or so as required by the RBI, there will be release of liquidity into the system which will add to the investible resources of the economy. The scheme may also provide that depending on the period of the gold deposit to which the liquidity 18 of 26

relates to classify the resources as short term, medium term and long term for purposes of facilitating the investment programmes of the banks. 3000-5000 tons of strategic-buffer stock potential to handle global prices Given the estimates that India has 3800 to 8000 tons of gold as investment, the RBI may be able to acquire strategic gold reserves of say 3000-5000 tons. This strategic gold reserves will bring multi-dimensional advantage for India. When global gold prices are on a high the strategic stocks with the RBI may thus be used as buffer stocks to augment local supplies which will enable India to reduce the dependence and demand on global gold supplies and also tame global gold prices. The moment it appears that India's import could go down, the world gold prices will tumble. Then the RBI/Indian banking system itsef could enter into buying of gold at lesser rates and augment national gold supplies. So the strategic-buffer stock of gold with the RBI will enable India to decisively influence global gold prices. Potential to cartelise with China Given the fact that India and China consume almost one half of global gold supplies, it is possible and even necessary for India to ally and cartelise with China in regard to buying gold in global market. Acquisition of gold mines abroad If India can influence the gold prices, India may also acquire gold mines elsewhere in the world to augment supplies for India. India will always be a gold loving and gold buying country given its cultural moorings and also the experience of recent times. Indian can play global gold came Thus strategic gold stocks will enable the Indian banks/RBI to play the gold game at the global level. That will also enable India to place itself on par with China, which has own gold production that India does not have, and thereby enter into cartel arrangement with China and coordinate their buying. This will enable them to tame the global gold prices. They may act together to bring down, maintain or raise the gold prices. RBI can augment stocks by lease or loan from other central banks If the Indian State builds sufficient buffer stock of its own gold by making the people of India part with their gold by consent, the RBI can take gold on loan and lease from other central banks, if need be using forward cover, and use it for its gold supply management. Now the RBI has kept its gold stocks in deposit with the Bank of International Settlement and also lent gold to other banks. The RBI may take gold deposits and also loans, if needed, for meeting the local demand for gold without buying gold, but that would be possible only if the RBI has adequate strategic stock of gold. This will enable the RBI to command a much higher supply of gold to handle the national demand beyond the stocks that it has built up through such efforts. So the capacity to access gold will go up once the nation builds up adequate buffer cum strategic stock of gold. 19 of 26

Tax immunity is at the heart of the success of the scheme Now comes the most fundamental part of the scheme. The scheme will succeed only if complete immunity is granted under Income and Wealth Tax laws to the gold deposited with the banking system under the scheme. It will not succeed without tax immunity. Tax immunity could also be justified on the ground that on government's own gold control policies the people were, till 1990, forced to rely on smuggled and other contraband gold for their requirements. Tax immunity should be conditional upon disclosure of gold stocks But the scheme must also make it compulsory for gold depositors to declare their gold holdings in other forms. Appropriate exemption may be given to small holdings, say less than five sovereigns per individual. But declaration should not entail the declarant to any tax or other burden by declaring it. Non-declaration should be viewed seriously with appropriate consequences. The government must recognise that gold is a sensitive family asset and is also a confidential asset of women. It has has to be handled with sensitivity. The government must recognise that the gold trade in India is so dispersed and decentralised it is impossible to organise it through law. If the market does it at its own pace, over a period, that is a different thing. The scheme should be open for 12-15 months The gold desposit scheme should be kept open for at least 12 to 15 months for people to convert even their jewellery stocks into gold and deposit it under the scheme. It is in the national interest to convert part of the jewellery also into investment gold and in turn into strategic gold stock of India. Formulation of the detailed scheme would require consultations with the RBI and the different tax departments. So, a multi-disciplinary committee of the different institutions involved may be constituted to finalise the scheme. X. Summary and Conclusion

The case for relook at gold in India and to build strategic stock of gold for India to emerge as a global player in world gold market may be summarised as under: a) Indian families, and even Indian religions, have reverential love for gold; history records that they have been draining the gold of the Romans and the Rest by trade and accumulating it for millennia b) Indian households are now estimated to hold between 18000 to 40000 tons of gold; and 3800-8000 tons as investments, and the rest as jewellery; and most of this is undeclared and is funded by unaccounted money and lot of it acquired through contraband imports in the past. And that is why the principal reason why government does not have any data on gold holdings in India, despite all gold control laws that it experimented with. 20 of 26

c) That ordinary Indians in rural areas hold most of the gold stock, namely 70% of the total gold in India points to the deeply massified gold habit in Indian society cutting across geography, language and other diversities d) Ironically thus, gold which was derided by famous economists as barbaric relic, has scored over modern financial instruments in capital appreciation; Indian families are richer by stocking gold. e) If at the micro level the Indian household love for gold has made them clever investors, at the macro level, India imports almost a third of the gold produced globally and because of that there is a drain on forex over $40 billion a year now f) This is causing serious balance of payments concerns and India is facing external risk because of huge trade deficits and current account deficits g) But with the experience of Indian government's unsuccessful fight against gold for four decades, it cannot think of banning or preventing import of gold, which is increasing year-on-year with the current years imports almost touching 1000 tons; the question of confiscating gold or dispossessing the people of it like in the West is unthinkable in India. Indian government has to live with gold as Indians cannot live without it. h) Yet, the Indian economic establishment seems to have no strategy, and seems almost helpless, to handle the huge and surging import of gold which is, almost single handedly, hiking the global gold prices and distorting the global gold market and prices. i) Ironically, the Indian demand is inflating world gold prices and Indians end up paying those prices and consequently India is drained of its forex reserves j) Paradoxically, the imported gold, unlike other items of imports, is pure forex asset and yet since it is not in government hands, it is out of the balance sheet of RBI, with the result it is recorded as a drain on foreign exchange reserves, despite being in India and in Indian hands. k) Despite India being the biggest gold buyer and importer, it could not influence or control the global gold prices because its import is not strategised by a national policy l) Gold, unlike other items of import, is not actually a drain on forex, but being itself forex, it is actually import of one forex asset at the expence of another. It is forex if it were in government custody; but in people's hands it is still forex but the government cannot access it. So technically the gold in Indian households is national forex asset but not government's. m) See the cycle: India has no gold, but, Indians love it. Indians have accumulated huge gold stocks and continue to add to it. India thus compulsively imports gold which it cannot afford. Indian government cannot ban or prevent import of gold. It is helpless about it. So Indian households' gold holdings which is global asset has 21 of 26

turned the liability of India. n) When Indian establishment is helpess about how to handle the gold lust of its people, the world is now beginning to view gold as a global monetary reference point o) This reinforces that India should work an appropriate strategy on gold and cannot drift along as it has been doing for the last two decades p) This paper suggests that the only way for India to handle gold buying by Indians and import of gold is to become a player in global gold market. If it has to become a player in global gold market, the Indian government has to build a strategic stock of gold as part of its forex portfolio. This strategic stock will act as the buffer stock of gold also. This is possible because gold, unlike other assets, is a forex asset. q) This paper does not suggest that Indian government buy gold in exchange for its current forex holdings. It suggests that the existing stock of gold in India held as investments should be secured by government by way of lending of gold by the people through a deposit scheme operated by banks, in the way people deposit their money. The scheme would be supported by government guarantee to return the deposited gold. r) The gold deposited in banks would be sold to the RBI by banks which will operate the gold deposit scheme with marginal gold holdings and the gold acquired by the RBI thus will become the strategic and buffer gold holdings. This will add to the forex reserves of India without dispossessing the depositors of their gold. Shortly stated, by issuing gold IOUs to the depositors, the government would have built strategic stock of gold. s) This will enable India to play the global gold game supported by nationally augmented strategic-buffer gold stock. The scheme, explained here, would also turn gold, which is now idle family asset, into investible capital besides as strategic forex stock of the country. t) The only way the government can build strategic-buffer stock of gold, which alone will enable India to handle the issue of gold nationally and globally, is to make the people of India households, investors and the rest including religious institutions to deposit their gold like they deposit their money into bank under the suggested scheme. India, being a gold revering country for cultural and religious reasons, it will always be a gold buying country. With no domestic supplies available, it will always be importing gold. It will be importing substantial part of the global gold supplies. Unless India is in a position to influence the world gold prices it will always be at a disadvantage as an importer. It is necessary for India to acquire adequate buffer stock of gold to use its buying power in the global market. Maintaining buffer stock of gold to handle the global gold market will be a permenant requirement for India. But to create the buffer stock, at the present moment India cannot divert its forex 22 of 26

resources as its forex stock is largely sensitive and unlike China's, it is not built out of export surplus. Therefore, Indian government will have to harness the stock of gold in investment form available with the people of India by the suggested scheme so that the RBI builds strategic stock of foreign exchange which will be buffer stock of gold also at the same time and then it would be able to influence the global gold prices and supplies to its advantage as the largest buyer. But for this strategic power to be acquired the fundamental condition is that, to harness the domestic stock of investment gold, the governement should offer tax shelter and immunity from all laws requiring disclosure of the sources of acquisition, without which it is not possible to make the scheme successful. Once the scheme is properly formulated and properly canvassed, it will help bring out the gold which is the idling at home and elsewhere and turn it into the reserve energy to drive the economy of India and into convertible forex asset to defend Indian economy from external risks. This will also add to the investible resources of the Indian economy and turn gold into a handlable security. The scheme suggested has multi-dimensional effect. The gold deposit scheme is recommended for serious consideration as there is no alernative to building a strategic and buffer stock of gold. Such stocks cannot built by buying gold in global market even if the country has the stable forex surply needed for such acquisition, as any such indication by India would only result the gold prices skyrocketing. In such case India and Indian families will again suffer as they have to import gold irrespective of the cost involved. Therefore in any view of the matter, a scheme to convert the existing stock of investment gold in private hands into strategic and buffer stock of gold in the hands of the RBI seems unavoidable.

References: 1.http://articles.economictimes.indiatimes.com/2010-12-20/news/27590869_1_gold-demand-wgc-netretail-investment 2.http://markets.financialcontent.com/stocks/news/read/15487807/List_of_Per_Capita_Official_Gold_Ho ldings 3. http://www.kitco.com/charts/historicalgold.html 4. http://www.google.com/finance?cid=983582 5. http://www.eximguru.com/export-import-news/india-s-2011-... 6. http://www.kitco.com/charts/historicalgold.html 7. http://www.eximguru.com/export-import-news/india-s-2011-.. 8. http://www.kitco.com/charts/historicalgold.html 9. http://www.gold.org/investment/why_how_and_where/faqs/ 10. cc.iift.ac.in/Ezine/2011/35.pdf 11. http://economictimes.indiatimes.com/news/economy/indicators/current-account-deficit-may-widenmore-inflation-risks-remain-high-rbi/articleshow/11203182.cms 12. www.cii.in/PressreleasesDetail.aspx?id=4381&gid=7 13. http://blogs.ft.com/beyond-brics/2011/12/05/gold-dullingindiaseconomy/#ixzz1foFu4ybU] 14. oaks.nvg.org/se6ra16.html 15.www.ggdc.net/maddison/articles/moghul_3.pdf 16. es.scribd.com/doc/.../Economic-History-of-the-Greco-Roman-World 17. http://www.globalsecurity.org/military/world/europe/spqr-mo 18. Power of gold: the history of obsession by Peter L Berstein [John Willey & Sons 2000 ISBN 0471252107] p164 19. Deregulation of Gold in India A Case Study in Deregulation of a Gold Market by Himadri

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Bhattacharya September 2002 Published by Centre for Public Policy Studies World Gold Council, 45 Pall Mall, London SW1Y 5JG UK Tel +44 (0) 20 7930 5171 Fax +44 (0) 20 7839 6561 E-mail cpps@gold.org website www.gold.org 20. Deregulation of Gold in India: A Case Study in Deregulation of a Gold Market by Himadri Bhattacharya; World Gold Council Research Paper No 27: available at website www.gold.org 21. http://www.hindu.com/biz/2010/11/15/stories/2010111550991400.htm 22. Ibid 23. Ibid 24. Ibid 25. Ibid 25. http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx 26. ibid 27. http://www.google.com/finance?q=INDEXDJX%3A.DJI 28. http://www.google.com/finance?q=INDEXBOM%3ASENSEX. 29. http://au.ibtimes.com/articles/261113/20111205/indians-carry-gold-worth-950b-macquarie.htm 30. http://www.icpd.org/development_theory/comprehensive_theory_of_social_development.htm 31. Ibid No 20 32. www.hdfcsec.com/research/ResearchDetails.aspx?report_id... 33. http://www.indianexpress.com/news/gold-set-to-shine-as-investment-vehicle-in-2/558446/ 34. http://www.businessworld.in/businessworld/content/India-See-Robust-Gold-Imports-Oct-Dec.htm 35. online.wsj.com/article/SB10001424052970204630904577057562820842998.html 36. http://www.eximguru.com/export-import-news/india-s-2011-... 37. http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm 38.www.newyorkfed.org/education/addpub/goldvault.pdf 39. http://en.wikipedia.org/wiki/Executive_Order_6102 40.Gold Sheet Historical Gold Production: http://www.goldsheetlinks.com/production.htm 41. Ibid No 21 42. US Gold Industry 2001 by John L Dobra NVBureacy of Mines & Technology 2001 [p10] 43. Central Bank Gold Reserves: A Historical Perspective sicne 1845 by Timothy Green World Gold Council 1999 [p12] 44. http://www.gold.org/investment/statistics/reserve_asset_statistics/ 45. Ibid 46. www.crnindia.com/commodity/gold.html. 47. Federal Reserve Bulletin / Oct, 1996: http://findarticles.com/p/articles/mi_m4126/is_n10_v82/ai_18786211/?tag=content;col1 48. http://www.usagold.com/gildedopinion/buckler2.html38 49. Ibid No 47 50. http://useconomy.about.com/od/monetarypolicy/p/gold_history.htm 51. http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13745 [Table No 157] 52. Ibid Table No 208 53. Ibid Table No 156 54. Ibid Table No 207 55. http://www.business-standard.com/india/news/rbis-income-grows-127-in-2010-11/447088/ 56. http://in.reuters.com/article/2011/12/22/indias-current-account-deficit-may-widenidINDEE7BL08L20111222 57. http://www.bgse.co.in/Market/News/523620/FIIs_continue_selling 58. www.telegraph.co.uk ... Comment Ambrose Evans-Pritchard 59. Financial Stability Paper No 13 December 2011 Reform of International Monetary and Financial System www.bankofengland.co.uk/publications/fsr/fs_paper13.pdf] 60. http://www.financialexpress.com/news/india-china-drive-global-gold-demand-in-q2-wgc/834003/ 61. See Economics in Crisis Bradford J Delong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research. www.project-syndicate.org/commentary/delong113/English; Also see Moden Economic Theory where it went wrong and how the crisis is changing it The Economist issue July 18th-24th 2009]. 62. Daily Gold ETF Monitor Tuesday October 6 http://www.goldessential.com] 63. http://goldnews.bullionvault.com/gold_demand_021720111 64. http://www.nuwireinvestor.com/articles/chinas-annual-gold-consumption-to-double-in-10-years54970.aspx 65. www.goldsheetlinks.com/production.htm - United States

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66. http://www.chinadaily.com.cn/china/2011-06/24/content_12764412.htm 67. China Gold Report: Gold in the year of the Tiger by World Gold Council available at www.spdrgoldshares.com/.../WOR5797_Gold_Invest_Report_China.. 68. http://www.indiastudychannel.com/resources/142329-Black-money-India-its-impact-Indian.aspx &
http://expressbuzz.com/topic/kerala-a-golden-sparkle-to-ill-gotten-wealth/266978.html]

http://www.commodityonline.com/news/how-the-average-indian-gold-investor-contributes-to-blackmoney-pool-40909-3-1.html] & http://epaper.timesofindia.com/Repository/ml.asp?Ref=QkdNSVIvMjAxMS8wOS8xMSNBcjAwNDAw 69. http://www.thehindu.com/business/Economy/article562648.ece]

About the Author* S. Gurumurthy popularly known as a writer and journalist in India is a corporate adviser of repute. A chartered accountant by profession, he is valued for his knowledge of law, finance and accounts. The Business Baron magazine rated Gurumurthys knowledge of economics, finance and accounts as outstanding. BG Verghese, a highly respected journalist, described Gurumurthy in his biography on the media baron Ramnath Goenka as a 'brilliant chartered accountant and exceedingly astute amateur lawyer' Gurumurthys investigative exposes have brought out corruption at high places since mid 1980s, including Bofors arms deal and the nexus between corporates and government, which led a beleaguered government to persecuting and arresting Gurumurthy in 1987. With the entire media standing by Gurumurthy, and demanding apology for his arrest, the government faced utter humiliation. The issues raised by Gurumurthy later became the main issue in 1989 Lok Sabha elections, which led to the defeat of the most powerful government since independence. Hamish McDonald, well-known Australian journalist, wrote in his book 'Polyester Baron', Gurumurthys investigative work 'must rank among the most powerful examples of investigative journalism anywhere in the world'. He also emphasised that Gurumurthy had 'a strong sense of probity' Gurumurthy was rated among 50 most powerful persons in India in 1990 [Gentleman magazine]; as the 8th most powerful [Business Baron magazine 2004]; as the 17th most powerful [India Today magazine in 2005].

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