The Current Account Deficit
(CAD) in India had touched alarming levels of 4% of GDP (India’s GDP is about
1.2 trillion dollars) in 2011, it then touched a scary 6% in 2012 and since
then has come down to a low of 0.2% of GDP in the last quarter of fiscal
2014-15. I will take a small detour to explain what actually is CAD. To begin
with, Current Account is the earnings of a country by way of international and
domestic trade, net income from abroad and net transfer payments made against
services imported or exported from a country. A country enters into a CAD if
their payments abroad are more than their earnings.
The drop in CAD
figures is a sign of a healthy economy, primarily attributed to the fall in Oil
bill with the prices per barrel of crude oil falling to a low of $60. Another
major contributor to our CAD is an ever increasing import of gold due to a very
high demand in the domestic market. India currently imports about 1000 tonnes of
gold every year, leading to outflow of foreign exchange, and pressure on
current account. Our erstwhile Finance Minister Mr. P Chidambaram had in early
2014 put in place quantitative curbs and enhanced tariffs on gold imports. But
the fact of the matter is that a huge cache of gold still finds its place in
our economy via the smuggling route.
While crackdown on
smuggling may be an answer, it’s not a long term solution. So GOI (Government
of India) is looking at three options very seriously, the first one being
Sovereign Gold Bonds, the second being Gold Monetisation scheme and the third
being Issuance of Gold coins
In this article I
will be primarily focusing on Gold Bonds. For details on other schemes keep
watching this space.
Sovereign Gold Bonds
Sovereign Gold Bonds
(SGBs) are government securities denominated in grams of gold aimed at bringing
down gold imports and providing an alternative to physical gold. Investors have
to pay the issue price in cash and the bonds will be redeemed in cash on
maturity, which is a maximum of 8 years. The bond is issued by the Reserve Bank
of India on behalf of the Central Government.
Gold bonds will carry
an interest rate of 2.75%, and will be sold through banks and designated post
offices. Applications for the bonds are being accepted till 20th of
November, and the bonds will be issued on 26th of November. Gold
bond aims to provide people an alternative to buying physical gold. The bonds
would be worth 2 gm of gold all the way till 500gm. This is the first tranche
of the gold bond scheme. The price of the first tranche is Rs. 2684 per gram. There
will be more such tranches.
Benefits and Challenges
Household savings
garnered from the bond will be put to productive use by the government as also
earn interest for the bondholder. Gold bonds are free from issues like
making changes and purity in the case of gold in jewellery form. The
bonds, to be sold by banks like SBI, either directly or through
their agents, can be also be held in the demat (dematerialized / paperless) form thus
eliminating risk of loss of scrip. They can be traded in stock market and can
be given by parents to their children as gifts. Moreover, it’s a Sovereign bond
and hence GOI will never default in its payments.
On the other hand,
the Gold Bond Scheme might fail to find many takers as the price of a gram of
gold at current prices is Rs. 2,599, with the expectation that it will fall
through 2016 primarily due to a stronger dollar, which is lower than the price
of Gold bond. Moreover the interest rate payment would be in cash, whereas
investors may look at payments in gold!
The first Gold bond
will roll out on the 26th of November 2015, and we have to wait and
watch the public response to such initiatives. It is a good initiative by GOI
to curb gold imports, but how successful, only time will tell.
- Monica Mor
Senior Faculty,
INLEAD
Images Courtesy- Google Images
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