Gold – the new Currency

Raman Swamy

IPL betting is being done in gold, not cash. Tax raids are uncovering hoards of gold caches. Gold smugglers have found new ways to bring in gold through land routes via Bangladesh and Nepal.

The Finance Ministry is faced with a new headache – supply and demand for gold is skyrocketing. Ground reports indicate that gold imports have jumped 580 percent in March-April. Bloomberg has estimated India’s gold imports last month at 120.8 metric tons. Reuters says dealers in India, the world’s second-largest gold market, are currently charging a premium of one dollar an ounce (Rs 65 approx) over official prices, over and above the 10 percent import duty.

 Gold market analysts assert that the sudden rise in demand for gold reflects what they call a “post-demonetisation backlash”.

Demonetisation was meant to flush out black money. Large denomination notes were declared illegal. Abruptly, 86 percent of cash in circulation was no longer valid. This led to a very severe cash crunch, especially because the new notes replacement process was painfully slow and inefficient and because drastic limits were deliberately imposed on exchange of new notes for old.

The expectation was that this would lead to a cashless or “less cash” economy and speed up a transition to electronic transactions. Latest provisional figures furnished by the Reserve Bank and the Niti Aayog are not only contradictory but also indicate that the shift away from cash is far less than had been hoped by the government.

Instead, gold has emerged as the new “safe haven” for hoarders and small savings alike. Not only that but gold is being used directly as medium of exchange in a variety of commercial, real estate and other transactions.

As the new IPL cricket betting modus operandi shows, even punters are pledging gold in lieu of cash. A report in a leading newspaper confirms that bookies are accepting wagers in gold and jewellery and, despite the cash crunch created by demonetisation, the volume of cricket gambling is expected to cross Rs 2000 crore in the ongoing IPL season.

As far as the government’s gold policy is concerned, there were a series of measures to curb spending on gold even prior to demonetisation. First, the tax on gold jewellery was hiked. That sparked a three-month-long jewellers’ strike last year. In August, the import duty on gold was upped from 8 percent to ten percent. That led to a sharp fall in official imports but a huge increase in smuggling.

This year, no further action against gold has been taken, mainly due to the assumpion that demand would be subdued due to lack of liquid cash. But in February, the government slapped a 12.5 percent import duty on silver. This was probably done because silver was becoming more popular due to higher taxes on gold.

However, the latest trends indicate that buyers are switching back to the yellow metal. Demand is soaring. Prices and premiums are rising. Smuggling is rampant. As a Finance Ministry official put it: “Paper money is scarce after demonetisation. But instead of switching over to plastic money, big traders and even commoners are showing a preference to deal in yellow metal for special transactions’’.

Raman Swamy raman-swamy@gmail.com

Frontier
Vol. 49, No.46, May 21 - 27, 2017