Imbroglio of the Finance Ministry and Changing Economical Environment

<a href="http://expertscolumn.com/content/imbroglio-finance-ministry-and-changing-economical-environment" title="Imbroglio of the Finance Ministry and Changing Economical Environment"><h1>Imbroglio of the Finance Ministry and Changing Economical Environment</h1></a>

Beware of Gold Imports, Cost and Current Account Deficit in India

India stands alone perhaps in the world where all its current account deficits are in large part due to the huge import of gold brought in by its populace residing at home or abroad. The statistics revealed by authorities point out to the fact that the gold import by India last fiscal is second only to oil. This is an extremely dangerous situation and can have far reaching negative impact on the economy. That most parts of this gold goes idle and stored as cultural and as a hedge against future price rise and future household expenses is now a layman’s information only. But it is not what you store that matters, but gold being a scarce commodity and takes away a significant portion of the nation’s foreign exchange. In other words, what could have been utilized as a monetary tool to spur growth and industrialization in the country is being utilized akin to non performing assets by hoarders mostly who are individuals and householders.

Getting to basics you ask why gold is hoarded in India:

      Gold is stored due to its intrinsic value, luster and rarity

      Gold in India holds cultural and dowry value due to larger existence of feudal culture.

      Gold is stored in India for the sake of storing irrespective of past, current or future value.

      Gold is a hedge against future price rise on commodities or fixed assets.

      Gold is a safer and gives better yield than any other assets presently available

Having stated the above reasons it is imperative that the RBI and the government must act in a pragmatic manner or we might see another situation like that of 1991. The following points ought to be taken note of to protect the larger interest of the country. 

      Introduce standards of other precious metal including coins and other precious metals so that their trade and transaction can be done through banks. Regular and frequent usage of standardized precious stones, materials or elements and their transaction can dissipate the luster attached to gold and their cultural affinity.

      Introduce gold sale and purchase of gold coins through banks as has already been suggested by the Government.

      Introduction of gold linked schemes as the same has been suggested in some circles.

      Allowing alternative coins with emotional and cultural and religious values that could substantially lower the craze for gold. The Vaishno Devi temple coins are a good example so long as these cannot be duplicated with ease. Then allow their easy transaction via banks. Dissipating choice like this would lessen the inclination to gold.

      Ban or immediately stop insurance on gold (ingots, coins or jewelry) as the same encourages the Non Performing Asset of the country by the Insurance companies although they do profit out of it. The requirement of the country shouldn’t be out of tune by allowing profiteering by insurance companies. There are other monetary instruments which the insurance companies can bank upon. Gold kept in banks as security to loan or pledging for other purposes are to be treated as performing gold. Those who require more security for their personal hoarded gold can keep body guards so that a few more people can be employed.Gold is by itself having a capacity to pay for its security. There is no need for a separate insurance.

      The State machinery and the RBI should focus only on and take action on diluting the NPAs and not to encourage them in the larger interest of the country. Gold hoarding is a supreme form of NPA to a large extent.

      The nationalized, private and scheduled banks as well as all the co-operative banks are directly responsible for the increase in allowing depositors to keep gold in safe lockers. These are NPAs harmful for the current account balance. However, these are quite necessary too for individuals to safely keep their wealth in gold. The RBI must pass strict rules and the Government strict legislation that a family cannot operate more than one locker. If a family has to then there is no harm and tax on this non-performing gold has to be levied with a declaration of what these individuals with second lockers are possessing. Taxes at the rate of 25 to 40% or more can be taxed on the 2^nd lockers (full load of gold) as a national imperative. This is irrespective of the fact whether the 2^nd locker is filled with less gold and more tissue paper or sponges. More lockers would obviously invite more penalty or taxes. Remember, there is more gold stored with co-operative banks and gramin banks than other banks. One locker per family can be allowed as it is almost a necessity and no tax ought to be charged on this. Performing gold should go tax free everywhere.

      The locker system has to be changed. The RBI must X-ray or scan lockers to ascertain the deposit of not just rare metal, but also Uranium, Plutonium, Drugs and other substance harmful for the society in their free form. A proclamation to this effect must be sent out to the public every three months at least to ensure that they are quite alert about it. The psychological act would serve a great purpose.

9   Banks must install separate lockers for documents if feasible. This would allow genuine customers to keep their valued documents including gold linked scheme, documents pertaining to landed property and others in a see through locking drawer system. Even though the main locking system is the same the smaller lockers ought to be made out of fiber glass or such other see through material.

1  Above all keep up a continuous propaganda machinery to encourage low cost jewels, elegance with basic comforts and values and adorning oneself just smart enough and even encourage the same through celluloid and state the evils of dowry. Nexus between gold transactions and land deals has to be investigated by an independent agency and legislation including land reforms ought to be mooted.