Many may not be aware, especially in our part of the world, that back in the year 1933, on April 5, US President Franklin D Roosevelt signed one of the most controversial orders in American economic history. The Executive Order No. 6102 criminalized the possession of gold by individuals and corporations and forbid “the hoarding of gold coins, gold bullion, and gold certificates within the continental United States.” This order was an extension of the Presidential Proclamation No. 2039 that criminalized the hoarding, possession and ownership of gold or bullion, and imposed a monetary penalty of $10,000 (equal to more $170,000 in today’s value) and imprisonment for as long as ten years on individuals falling foul of the law.
Obviously, such laws on hindsight look very undemocratic and politically suicidal; but then, if one were to explore it and go beneath the surface, the big picture may gradually get vivider. In tough economic times, gold and similar forms of monetary elements can become a key source of increasing money flow in the market. One should remember that most nations (including ours) have at one time or the other even printed money based on the amount of gold kept in the federal bank (Reserve Bank of India, in the case of India). In other words, hoarding of gold by communities, corporations and individuals not only decreases the flow of money (given the unproductive capital locked within such hoarded gold) but also to a large extent disturbs the supply-demand equilibrium of gold and bullion. Before I reach India, let me in brief discuss the way Uncle Sam tapped (or as many critics would say, exploited) the Executive Order No 6102. The order forced every American citizen to surrender all their gold, leave 160 gms, to the Federal Reserve in exchange of a fixed amount of money. After receiving most of the gold, the US government increased gold prices manifold, thus churning out a huge amount of profit, which was used for the Exchange Stabilization Fund (ESF), a fund that enables the American government to control currency exchange rates. In 1964, the previous laws were modified and the ownership of ‘gold certificates’ was legalized, followed by the legalising of gold trade in 1974 – after almost three and a half decades.
The importance of and aspiration for gold ownership in India requires no introduction. Despite economic turmoil, the consumer demand for gold is up by 51 per cent in Q2 2013 while the demand for gold bars and coins is up by 116 per cent. As per various unofficial estimates, more than 60,000 tonnes of gold are lying idle in the form of jewellery and ornaments all across the nation. Going by the current price of gold at the rate of Rs.35,000 for ten grams, this unaccounted reserves could create a possibility of reaping about Rs.2,10,00,000 crores in money supply! Going by World Gold Council figures, Indians hold 20,000 tonnes of gold (which is an absurdly less figure, as a single temple in South India holds more than 1000 tonnes of gold); even considering this reduced figure of 20,000 tonnes (which is 33% of the unofficial estimates), the amount we’re talking about would be nothing less than Rs.70,00,000 crores!
Against these jaw-dropping numbers, what looks hilariously minuscule is the state of RBI. Despite such huge national deposits of gold, RBI has an official reserve of a mere 550 tonnes of gold, compared to 1000 tonnes of China (which is again debatable) and 9000 tonnes of US.
The Government of India should immediately draft and announce a Central Gold Bond scheme, where it should ask people to deposit their gold with the government in lieu of Central Gold bonds at a fixed rate of interest of around 9%. One reason I mention this percentage is because in my calculations, I have realised that despite the huge surge in gold price, in the last 65 years the same has increased by only around 9% per annum compounded. With respect to the government’s gold bond scheme, people should of course be allowed to take back their gold after say a period of 15 years. The same will be applicable for temples, trusts and other similar institutions; for them, the government could even make it compulsory to deposit all gold and make hoarding beyond a limit illegal. These institutions should be thankful that the government is not nationalizing their gold hoardings, given the immense employment generation potential this money can have. Thus, a huge percentage of gold in physical form would be directed to the Reserve Bank, which, in turn, would utilise the same to increase the money flow and to adjust the exchange rates of our currency. Similar schemes have been in the past practiced by many European and African nations, with the latest being Venezuela.
This one scheme would serve several purposes. Firstly, it will make the INR stronger, subsequently boosting international trade, especially our mandatory imports; because, with the INR getting weaker, the cost of doing cross-border trade is increasing and the old deals signed at old exchange rates are becoming infeasible to continue. Secondly, it will create huge employment opportunities if the money so sourced is invested honestly in infrastructure or for energy generation/oil production and other such extremely key needs of this country. The money thus minted should only be used for employment generation and entrepreneurship, which eventually would increase jobs in the market and would spirally improve the flow of money further. Thirdly, the entire process of converting physical gold to paper gold would decrease the incidents of gold smuggling and gold hoarding and above all make all gold possession transparent.
Apparently, as of now, it is impossible to even estimate the amount of gold lying inside our nation; and most of these gold hoardings have evaded taxes too; as even today, domestic consumption of gold is not through authorised outlets but through trusted local gold traders. In such cases, tax-evasion is a cake-walk.
Such schemes would obviously invite criticism, but when the economy is going through tough times, the political corridors need to take some tough and non-populist steps. The only apprehension that I see here are scams and corruption. Even an iota of embezzlement would create a dynamo effect and ruin the entire economy and social harmony. In such a situation, the entire execution needs to necessarily be politically independent and under a body such as CAG or Supreme Court with everything being tracked electronically and centrally. The fall of INR to Rs.68.80 per dollar is a matter of utter shame, especially after luxuriously introducing an expensive sign for rupee! After all, as they say, looks can be quite deceptive!
- 30 August 2013 |
- Dr. Arindam on Indian Economy