Cogencis, Monday, Sep 24

    By Stuti Chawla and Mugunthan Kesavan
    NEW DELHI - Gold is back under the government scanner after India's current account deficit surged to an over five-year high in July.
    Though the trade gap narrowed slightly in August, imports last month were at an 86-month high of $45.24 bln due to a surge in gold and oil imports.
    Gold imports in August nearly doubled on year to $3.64 bln, raising concern that the government may look at increasing the import duty on gold to 12-13% from 10% now as part of its exercise to cut down on import of non-essential items.
    Though government officials have denied talk of an increase in import duty, they have hinted at other curbs to curtail gold demand.
    World Gold Council Managing Director for India Somasundaram P.R. believes that instead of curbing imports, the government should focus on bringing transparency in gold purchases, and introduce "know your customer" norms to regulate demand.
    Unlike in 2013, when the trade gap widened primarily due to high demand for the precious metal, "gold is not at the centre of the current issues", he told Cogencis in an interview.
    Even though the value of gold imports rose in August, the overall demand in terms of weight has been subdued, Somasundaram said.
    Demand for gold in India fell over 9% on year to 302.8 tn in the first half of 2018 largely due to high local prices of gold in the wake of a weak rupee.
    Even with festival season round the corner, India's total gold imports in 2018 are likely to be at the lower end of the 700-800 tn range, well below last year's 887.7 tn, Somasundaram said.

The following are the edited excerpts of his interview:

Q. Why has overall demand for gold been subdued this year?
A. What we have seen is that over the last six months, the Indian gold price has risen slightly while the international price has come down. The depreciation of the Indian rupee has made it difficult for the Indian consumer to benefit from low international prices. The Indian gold price is still at 30,000 rupees per 10 gm, though the international gold prices have fallen to $1,200 an ounce.
    On top of it, there has been a reduction in hot money chasing gold due to various transparency measures put in place, particularly the goods and services tax. We believe that this is a good thing. Though there has been a temporary dip in demand over the last two years because of demonetisation, making Permanent Account Number card mandatory for big purchases and introduction of GST; the gold market is slowly getting more organised. As gold buying becomes more transparent and as it becomes a mainstream asset class, India's annual gold demand will gradually get back to 800-900 tn, but then it will be more sustainable.
    
Q. How will demand pan out in the second half of 2018, particularly when the government is looking at curbs on imports of non-essential goods?
A. This year, India's gold demand will be 700-800 tn, perhaps at the lower end of the range. There will be a normal seasonal demand, but it will not see a sharp spike. Normally, when there are current account issues, whenever rupee depreciates, people flock to gold, as in that scenario local inflation is high. Those factors don't exist now. Even today, gold consumers have not started picking up gold in a big way because there is nothing specific happening in gold, and other asset classes are still doing well. Yes, equity markets have come down, but generally it is not an uncertain situation as was the case in 2013. Currently, the problem is localised to just currency and probably an increase in oil price. Local inflation is still under control. Therefore, it has nothing to do with the gold market.

Q. With Apr-Jun current account deficit at a five-year high, do you think the government will need to impose curbs on gold import?
A. Yes, that is always a risk. But my opinion is that gold is not at the centre of the current issues. So I doubt if the government will do anything. It is also our wish that the government does not do anything. It is not gold which has led to the trade deficit this time, unlike 2013 when increase in gold demand led to rupee dropping further. 
    Also, I don't think any kind of curbs on import would work, as that would drive trade to the grey market, and that's not helpful.
    Our view is rather than bringing import curbs, this is right time to bring in more transparency in gold buying to make gold an asset class. 
    Unless you reform gold, the financial sector reforms in general will not work. We want more transparency in the economy and that can happen only if you make real estate and gold very, very transparent.

Q. What is the quantum of gold import through grey channels this year? Has it gone down because the spot prices were at a discount to international prices?
A. Last year, imports through grey channels were estimated at about 118 tn. Initially, when curbs on gold import were imposed in 2013-14, the quantum of gold smuggled into the country was more than 200 tn. It has since dropped. Of late, we have seen that with GST and other transparency measures being introduced, imports through grey channels have come down. Even at 10% duty, the grey market is actually shrinking, and smuggled imports should be lower this year. That is why the government should not do anything now that actually derails the reforms that have been undertaken.

Q. What are the measures that can be introduced to bring in more transparency in the gold market and make it an asset class?
A. First of all, there should be complete traceability at the point of buying--who bought what. Can you buy mutual funds without know your customer norms today? You can't. You have to give all your data. The same thing should be applied to gold. At least further sales would be traceable, and new gold stock will not face the same problem as the current stock of gold faces. 
    We need to ensure that all purchases of gold are like any other asset class, linked to KYC documents, and the government saying it will allow this stability to continue. 
    Gold is largely supported by unorganised trade. To make it more organised, you need infrastructure, which is primarily introduction of bullion banking and creation of gold spot exchange. 
    Niti Aayog recently released a report that said gold must be treated as an asset class. To implement it, the government should allow bullion banking in the country, where banks treat gold as a currency. They deal in gold, take bullion risk, borrow gold instead of borrowing dollars. 

Q. What are the impediments to bullion banking?
A. The impediments are largely regulatory. Also, lack of understanding by banks, lack of bullion risk management practices and gold being treated as a commodity instead of an asset class. So far, banks are only channelising agents for gold imports. But right now, we have a huge stock of gold in the hands of households and, therefore, bullion banking is important. We just have to create a regulatory scenario where banks are more equipped to deal in gold.

Q. What is the status of WGC's blueprint on spot bullion exchange?
A. We have developed a blueprint for setting up a bullion spot exchange. The draft is just doing the final rounds. It will be ready in the next couple of days, then well definitely circulate it and make it public. It states the market's requirements from a spot exchange and the regulatory changes needed.

Q. Do you foresee a decline in India's gold demand in the second half of 2018 due to the floods in Kerala, as capital would be diverted to re-building instead of gold purchases?
A. Kerala is a big market for gold. Southern India accounts for about 40% of the country's total gold demand. We don't have state-wise break-up of demand, but we know Kerala is a big market. It was not a small event that happened there, we believe it will have a significant impact on demand. But how much gold buying comes back in the state will be known only after the season is over.  End

US$1 = 72.57 rupees

Edited by Akul Nishant Akhoury

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