Policy and progress: WGC Update
A coherent policy framework
Could help make India’s gold market!
In a row the WGC announced their Market Update, India's Budget: policy and progress. The update says, India, a nation that accounts for around a fifth of annual global gold demand, has a long history of gold-focused policies. These, however, have often distorted the market rather than achieving policymakers’ aims.
Announcements in the Union Budget on 1 February 2018, however, suggest this might change. Arun Jaitley, India’s Finance Minister, explicitly highlighted the government’s desire to formulate a comprehensive policy to develop gold as an asset class, create gold exchanges, and revamp the Gold Monetisation Scheme.
The Budget also included policies designed to boost rural incomes. Better gold policies combined with rising incomes could bode well for India’s gold industry. Coherent gold framework: In the 2018 Union Budget, the Finance Minister made three key announcements on the government’s plans:
1: It intends to formulate a comprehensive gold policy to develop gold as an asset class. This represents a significant change of tack and could have positive implications for India’s gold market. For example, it could encourage regulators to embed gold in India’s financial architecture and financial institutions to develop gold-backed financial products, making it easier for institutional and retail investors to access gold.
2: It intends to establish an efficient system of regulated gold exchanges. This is an ambitious aim. India’s gold market is highly fragmented and riddled with inefficiencies. For example, gold trades at different prices in different cities. A regulated exchange can result in a more efficient and transparent market, which should boost investors’ trust in gold as an asset class. It could also support the development of India’s recycling market, as well as the Gold Monetisation Scheme (GMS).
3: It intends to revamp the GMS, which, if done correctly, could make it easier for consumers to open Gold Deposit Scheme (GDS) accounts.
These policy announcements are all interlinked. Revamping GMS can support the gold exchanges, and the development of the exchanges can support GMS. And this could boost liquidity in India’s gold market, thereby supporting the development of gold-backed financial products.
In our view, the government’s new approach is positive for India’s gold market. As we explained in Why India needs a gold policy, jointly published with the Federation of Indian Chambers of Commerce & Industry in 2014, a gold policy focused solely on imports will only encourage smuggling.
As we see it, an effective policy needs to recognise the positive role gold plays in Indian society and strive to create a transparent and efficient gold industry.
Boosting rural incomes: India’s Finance Minister, Arun Jaitley, delivered a budget designed to drive the country’s economy forward. It focused on the rural economy, healthcare, education, infrastructure, and digitisation. The focus on the rural economy is especially important in the context of gold.
Rural India accounts for around two-thirds of India’s gold demand, and this is heavily linked to income levels. Indeed, our econometric analysis reveals that, as a rule of thumb, a 1% increase in income leads to a 1% increase in gold demand, all else being equal.
The government’s aim to double farmers’ income by 2022, therefore, can bode well for the gold market. The Finance Minister announced an increase in the Minimum Support Price to 1.5 times the production cost of crops, and farmers are already benefiting from market infrastructure reforms. At present farmers sell their produce in local mandis – market-places where food and agri-commodities are sold.
But under an initiative spear-headed by the Ministry of Agriculture, existing mandis will now be connected to a pan-India electronic trading platform. This will connect farmers, traders, and producers all over India so that they get the best price for their produce.
Finally, to boost farmers’ access to finance, the annual agricultural credit target was increased to Rs 11trn (US$170bn) in 2018–19, up from Rs 10trn (US$155bn) in 2017–18.
Outlook: We believe the policy announcements made in the Union Budget should be positive for India’s gold industry. A coherent policy framework could help make India’s gold market more efficient, transparent, and – most importantly – trusted by all stakeholders.
These announcements, however, were light on detail. They set the direction of travel, but not the exact path, and over the coming months government officials, including the think-tank NITI Aayog, will flesh out the next steps.
We believe there may be some important developments in the short-term, though. For example, the Bureau of Indian Standards is working on regulatory guidelines to make hallmarking mandatory. This is expected to come into effect in 2018. This should ensure the integrity of India’s gold supply chain, protect consumers from under-carating, and enhance the reputation of India’s jewellery industry.
After receiving a positive recommendation in the recent Economic Survey, momentum is building behind the development of modern infrastructure in the form of new jewellery parks, which will be home to manufacturers, hallmarking centres, banks, and logistical support. This can help make India’s gold industry more formal and potentially boost employment and exports.
Many in the bullion industry expect the Bureau of Indian Standards to produce good delivery standards for 1kg bullion bars processed by local refineries. This could be an important step in creating a standardised bar that can be accepted by local banks, commodity exchanges (MCX and NCDEX), and the proposed gold exchanges.
Some policy areas may take longer to progress than others.
As we outlined in our recent paper A gold spot exchange for India: Delivering structural reforms, the formation of a national gold spot exchange will entail a detailed process of engaging with banks and other market participants to design and build the right solution for India’s gold market.
We believe that as well as benefiting from these reforms, India’s gold market can be supported by the economic boost recent financial and fiscal reforms could deliver. The World Bank, for example, predicts India will become one of the world’s fastest growing economies in the coming years, while rural India should benefit from the government’s aim to double farmers’ income by 2022.
