METALS FOCUS: Indian gold initiatives to have little effect on imports
As readers will no doubt know, the Indian government has announced two initiatives which it hopes will reduce the high level of gold imports and thus help alleviate the country’s big Current Account Deficit, gold making up such a large proportion of the nation’s imports. There are two main schemes being implemented – The Gold Monetization Scheme (GMS), and the Gold Sovereign Bond Scheme (GSB), both of which were unveiled last week. India is also to produce an official gold coin and gold bar.
In a new analysis of the schemes, London-based gold consultancy, Metals Focus reckons that the schemes are unlikely to have an immediate impact, although in the longer term it is possible that they could build up to perhaps meet the government’s target saving of 100 tonnes of gold imports, but that this could take a few years. It would also have to overcome a natural reluctance of the Indian gold holders to part with their bullion which they see as protection against economic mismanagement and long term inflation.
The new schemes are aimed at monetizing some of the huge amounts of gold believed to be in private hands in India – in particular some of the religious temples have huge hoards of gold which have been built up over the years. The idea is to give gold holders a way of generating income from their bullion holdings, although the general distrust of the economic system which prompts Indians to hold gold in the first place will indeed likely have a limiting impact on the take-up.
Metals Focus notes that the GMS appears to be rather better structured than the earlier Gold Deposit Scheme which has been in place since 1999, but has only attracted some 15 tonnes since its implementation. Under the GMS the government will pay 2.2-2.5% interest for medium (5-7 years) and long term (12-15 years) deposits, leaving the banks to determine short-term deposits. This is crucial, as Metals Focus believes the majority of deposits will be short-term ones (of 1-2 years). It thus reckons that short-term rates will fall short of 2% and such rates are unlikely to attract many depositors. Also significant is that the jewellery sector has been excluded from the process, and this is a sector which has a greater reach among consumers than the banking network.
Further, even though the government has not asked for proof of gold ownership, there are aspects of the programme that will likely deter larger gold holders from participating. Namely, the compulsory disclosure of PAN CARD (an individual’s permanent account number), as well as a recent comment from the Finance Minister to not view the GMS as a quasi-amnesty scheme. Having said that, some temples are expected to participate and they are said to have massive gold holdings. Even so, overall, Metals Focus suggests that the GMS will secure no more than 15-20 tonnes in its first two years.
Turning to the GSB, the 2.75% interest offered by the government to bond holders appears potentially to be a major positive says Metals Focus. Even so, the consultancy feels the take-up will be modest, despite what appears to be an extremely attractive offering. It attributes this to several main issues. First, the bond has a very long tenor of 8 years, with an option of an early exit from year five. For many potential investors this period will be too long to be locked in, should secondary market liquidity prove low. Second, the price of the bond is inclusive of the import duty and so a possible cut in future would have to be borne by the consumer.
Arguably there is a disappointing lack of any kind of tax incentive to potential bond holders. A high-profile marketing campaign would help the GSB become a success, but so far there appears to be little evidence of this, either from the banks or the government. In fact, during recent meetings with commercial banks, it was revealed that GSB advertising had been largely restricted to a small number of emails sent to clients. Finally, the limited initial window in which to invest in these bonds, of just 15 days, may also act as a deterrent.
Metals Focus notes that it is important to stress that most of the above-mentioned factors are short-term headwinds. Over the longer-term, the GSB could be a success, with the prospect of rising gold prices acting as an added incentive to encourage greater participation in the scheme. So, Metals Focus believes that in the short term at least, these initiatives are unlikely to have a material impact on Indian gold bullion imports. The key point here is that it will take time for the government and other stakeholders to create sufficient awareness across the market. Once this is achieved, investor participation should improve, although this is likely to favour urban, rather than rural, consumers.
11 Nov 2015