“A STUDY ON PROBLEM FACED BY GOLD INDUSTRY AND PROVIDING FEASABLE SOLUTONS TO OVERCOME IT” Dishant Gosain1 Mehak Ahuja2 Sonu Kumar3
1, 2, 3 Student, Delhi School Of Management, Delhi Technological University (formerly DCE), New Delhi, India dishant3281@gmail.com, mehak.ahuja3@gmail.com, sonurca11@gmail.com

ABSTRACT

In India, gems and jewellery has always symbolized wealth and prestige. It has always ignited desire unlike any other object of importance. This industry has always been an important driver of Indian economy with its great influence in large-scale employment generation, earnings from foreign exchange through exports, and value addition.
The Indian gold industry, which has a vast potential of being a kingpin of the financial system of India, is currently facing potential stagnation, with difficulties at multiple fronts. It is hence essential for its various stakeholders, like the government, Reserve Bank of India, and the gold industry, to initiate large-scale transformation so as to ensure a sustainable and well modulated industry.
In this article we try to develop a clear policy framework to address key structural and regulatory challenges. The various institutional mechanisms required to bring the entire gold industry under standard and uniform governance to pilot long term direction setting on gold are formulated and numerous suggestions on reducing the supply constraints in gold without perturbing CAD have been proposed. The aim of the article is to suggest what kind of infrastructure and policies are required to enhance industry efficiency (including but not limited to uniform standardization and price uniformity) and to ensure that gold gets embedded into the financial system of Indian Economy.

1. INTRODUCTION

Currently the Indian Gold Industry is facing multiple challenges. Not only this industry is being blamed for high CAD but this industry is being seen as the main reason due to which the economic activities in country are getting slowed down and local investments are drying up. In order to fix the 'gold created issue', government and other agencies have started to take strict actions. The entire Indian gold industry has greater manpower than even the IT industry marking the significance of Gold Market in the Indian economy.
So instead of seeing gold as culprit of all the issues, the industry should be seen as an opportunity. Its not that we don’t have a structure in place but structure need to be modified with the modern India. Henceforth, it needs a major evolution from its current structure. The way people and government perceive gold should be changed and instead of seeing it as a thing of hush-hush it should be made and seen as an integral part of our financial system.
The major concerns related to the gold industry in India are as below: * High Import dependence * Limited recycling * Absence of standards * Overregulated consumption industry and under-developed investment industry * Idle gold locked up in vaults * Smuggling * Backing currency with gold * Easy bank facilities to lend loan and other facilities on gold deposits * Lack of education and awareness * Taboo that utilizing gold is a sign of hardship * Monetizing issue * Administrative issue

There is not a single pill which can cure the entire above mentioned anomaly overnight but the through the below proposed solution we try to tackle the issues on multiple fronts to bring Indian gold industry out of its current crisis and also to unleash the hidden potential of it in a time span of two to three years.

2. PROPOSED SOLUTION The motto of the proposed solution is to better and increase the efficiency of existing system through different activities which will grease the different parts of gold industry and make it better. Now there are few immediate actions which are required:

2.1 BRINGING SYNERGY AMONG SEVERAL GOLD REGULATING BODIES
Present Issue and its Impact
Institutions which are currently regulating the gold industry are not operating in synchronization. Multiple decision making bodies are actually diluting the decision making speed, its efficiency and more-over confusing investors. Say, for example, finance ministry sees gold import as a problem and hence increases the duty to 15% on it. But for gold traders and associations, this move is not favorable for the good health of the gold industry.
How to get rid of this Issue and minimize its impact
So to get rid of this kind of unilateral decision making where every institution is making a decision by just seeing through a small prism of its own interest, a powerful team should be formed from all the ten bodies which are currently regulating the Indian Gold industry. The team should have recommendation making capability and executive powers. In this group say two or three members will be from the gold trading agencies and unions also. Moreover two people will be highly rated intellectual with deep and global understanding of gold market. So in total this group will be of almost 15 people.
Impact of this solution
The proposed solution will bring out the following impact: * Synergy * Fast decision making * One single body to understand and evaluate the entire gold industry

2.2 VOLUNTARY DISCLOSURE PROGRAM AND INCENTIVES
One of the major goals of this scheme is to know who is having more than 250g of gold and maintaining a separate database for it. This is going to be a key entry criterion for our next phase of gold collection
Present Issue * Gold is locked in vaults * Even though India has huge pile of gold very less amount is in market circulation and trading * Undisclosed and unaccounted gold * No incentive on disclosing your gold pile

Taking cue from past
In Jan 1963, the Indian Government came up with ‘Gold Control Rules’. In this individuals had to declare their gold holdings. Again in 1965, the government came up with a similar plan. In 1975, government came with Voluntary Disclosure of Income and Wealth (Amendment) Ordinance, 1975, granting immunity from confiscation, penalty and prosecution under the Gold Control Act, 1968, to all disclosures of wealth and income in the form of gold within the stipulated period.
Why it was not a hit in past and how to make it successful now:- i. Absence of proper channels in past

These government initiatives did not succeed much because of several reasons, like, lack of proper communication channel, unawareness of the rule and its impact etc. Now when the government has huge good public bank penetration and reach, communication channels like television, newspaper, radio etc. the voluntary disclosure scheme should again be brought in. ii. Not much incentive was given for disclosure

This time incentive will be also given to the disclosures in the form that their property will be exempted from tax for the next 2 years. Technology will also be used extensively to collect the data in which banks will have a major role to play. They will provide the user with a certificate stating the quantity, purity, nature of the disclosed gold. iii. No lower limit was set

Firstly, the focus should be on middle and upper class as for poor people and people up to lower middle class, their gold possession is not the problem. Problem is when upper middle class and rich people are putting their gold in vault. We are taking the limit of 250gm per family. So whoever is having 250 grams or more gold and if they have not disclosed it with banks then it will be considered as illegal.
In future after the expiry of that voluntary disclosure window if in case anybody is found to have unaccounted gold then they will be liable for punishment. iv. Grey Area
The catch: “What if somebody acquired 250g of gold after this voluntary disclosure period”.
The rule will be that whenever you reach the limit of purchased gold to 250g after the disclosure period, you should disclose it with your bank within three months of your last purchase.
Also government will announce that the gold will be not taxed for the next 2/3 years (number of years should be decided based on the fact that consumer should also feel incentivized and government should not lose much tax amount). Now, here is a loophole. First seeing this benefit many people who are having black money they will try to convert it into gold. But if this happens then there is no problem with that. It will be actually good for the Indian economy. Second seeing the entire tax exemption many people will start buying gold once the voluntary disclosure will be announced. But as already said gold is itself not a problem. Problem is how gold is being utilized. So even if they buy gold it will be accounted and government will try tooth and nail to bring that gold in financial system which is described next.
2.3 AGGRESSIVE GOLD COLLECTION SCHEME THROUGH BANKS AND OTHER MODES
Present issue * Currently government doesn’t know who is having how much of gold and so targeting with regard to pushing gold holders to go for gold related schemes and communication for how to utilize gold effectively is very poor. * Banks are not aggressive in gold collection. * No clue how to utilize the collected gold. * India has very few mines.

Way out:
i. Proper targeting and pushing customers
Now after the closure of voluntary disclosure and banks have the data, they should start pushing the consumers (with large gold quantity that is more than 250g) to deposit their gold in several gold schemes. Also the newly formed committee should encourage and put banks with some deadline and target. Banks should display the entire information regarding the gold deposits and disclosure in local language and put the banks on notice for displaying bill boards and having campaigns in their respective areas. ii. Tax and other incentives to collect gold
Attractive offers for gold deposits should be brought in. * In case of bars and coins, incentive can be more because they can be easily circulated in the market without the consumer’s permission. * Also many times people will carry the gold jewellery with very old designs so they should be encouraged that they will get same amount and same purity gold ornament in better designs, here also incentive could be more as the gold can be circulated in the market. * If the consumer is adamant that they want the same design then they will not get any incentive as that gold has to be kept idle in the vault. So banks can also refuse to take such deposits. Also if they don’t give up on such adamant behaviour anyway that gold has been accounted and government will earn tax on that after 2/3 years.

iii. How to deal with maturity and pre-mature pull from deposit schemes
When customer will deposit their gold to bank they will be issued with certificates containing details of the deposit. Now there are two situations:
Premature Pull: If a consumer prematurely pulls out of his deposit scheme then he will not be paid the gold but cash money with the value of gold on that day. Now there is a loophole here also. Whenever a consumer will think that gold price is reaching high he may be tempted to take away his gold before the maturity period itself. But still there is no harm as gold is there in the system and not idles.
Mature Pull: After maturity of the scheme either the person can collect his gold from bank or they can collect their gold in the form of jewellery (this will apply if they have deposited gold jewellery) from semi-government jewelers. Therefore, these semi-government jewellers will also keep the designer jewellery so that people can purchase from the same. Also the making at these stores will be regularized such that people can get designs according to their choice. iv. Bond Issue
Government will take the gold from the holders and issue them a gold-bond of 5-10 years. The bond will include the agreement of issue of 4% p.a. interest on the value to gold submitted plus the market value of gold at the end of the tenure. On one hand this scheme will help government to collect gold and circulate it and on other hand this will be safe for the gold holders as well.
v. Acquire oversees gold mines
Apart from this India will try to acquire few gold mines outside India say in Africa. From their raw gold will be brought to India. This will help in case we are not able to meet market need from the other modes of gold collection. This will also help in reducing foreign currency outflow.
2.4 UPGRADING OF EXISTING REFINERIES TO INTERNATIONAL STANDARDS
Present Issues * India has got so far not a single refinery which satisfies the International Standard. This leads to few problems. All the merchants and institutions who all are dealing in International Standard gold have to import gold due to lack of local availability. * Moreover Indian traders are not able to export also as without International Standard approval demand is not good. * The current refineries are not very competent technically. India lacks skilled manpower to deal with recent technological innovations in this field also. * Apart from this lack of proper standard leads to non uniformity in the market. Trading in terms of gold stock exchange and FII such exchanges are also limited.

So to sum up India needs to upgrade its existing refineries to International Standard. This will help to bring: * Uniformity * Standardization * Will push export

| INDIA | CHINA | USA | TURKEY | REST OF THE WORLD | RATIO OF USAGE TO NUMBER OF REFINERIES | VERYLARGE | 40.5 | 35.71 | 51.67 | 59.92 |

As our plan will take almost two years to get implemented, for the first two year we are assuming that there will same demand in gold as that of now that is growth of 20%. After that the demand will decrease because we will be able to rotate the existing gold and hence total demand growth rate will drop to 10%. Now once our plan will be fully functional, the domestic gold rotation will increase and hence there will be net decrease in total demand to 2%.
2.5 DEALING WITH UNORGANIZED GOLD SECTOR
In order to curb the unaccounted dealing of gold through small shops across country which takes places unethically the government is required to mandate a policy.
Bringing in a mandate
It will mandate that every gold merchant who is having accumulated gold value in the form of raw gold, jewellery, bars etc worth more than say 20 lacs (this amount has to be decided based on the fact that what is average size of Indian small merchants and the value of their trade) has to register its shop with the government.
Forcing for uniformity and standardization Also, it has to use and sell gold certified by international standards only. In case they have un-standardized gold reserves then they have to exchange that gold with standardized gold from the refineries. This way by luring the retailers to get their gold standardized without shelling out any extra penny from their pockets, the unorganized gold market will become standardized and also help out in stopping the unaccounted gold dealings in the market.
Not at Extra cost
This policy will not raise government expenses as already the refineries are operating at only 25% of their full capacities. Also it will generate more employment opportunities in this sector. So, the government can benefit by using its full capacity and also earn some money by collecting taxes after 2/3 years of tax free period for the previously unaccounted gold.
Outcome
Now once few refineries accredited by International standard will be in place, all the deposited gold will be refined and marked with an appropriate international market standard which will make our gold both suitable to Gold Exchange trade and supply to Indian retailers and manufacturers for the purpose of making jewellery. This will bring standardization and uniformity in gold industry.
Now all these above actions will either lead to surplus or deficit or equilibrium in demand and supply of gold. Now if there is surplus then that surplus should go in the Indian foreign reserve and the extra money should be utilized to import more technology and other high value productive commodity. And if deficit remains then import of raw gold should be done
2.5 MOVEMENT OF THE GOLD TO GOLD TRADING AGENCIES AND TO WHOLESALE RETAILERS
Present issue * Sold to large scale importers to reduce imports. * Sold to retail giants like Tanishq or TBZ. * Back up mutual funds and ETF. Once the gold bars with internationally approved standards are fabricated out from the refineries they are ready to be used at various platforms. They can be majorly sold out to the large scale importers of the gold to reduce the current quantity of imports.
They can be also sold out to retail giants like Tanishq, Tri Bhuvandas Zaveri(TBZ) and other retailers who are affiliated with the government to supply the consumers, who have invested their gold in the ongoing government scheme to get their latest designed jewellery, to reduce their dependence on imported gold. Some part of this production can also be used to back up the mutual funds and ETF which will promote Indian trade.

Impact Analysis on Import and Projection

At present, import done for gold is around 11% of total imports which amounts to 33875.8 US $ million. According to the plan, we can give 3-4 months time for voluntary disclosure of gold to people who have more than 250gms of gold and it would take around a year’s time after that for the government to collect all the gold and take it forward to the refineries for further standardization. Till that time the people will become more conscious and the gold requirement can be controlled. Also the refineries can start giving their output by next 6 months. Therefore, after 2 years from now we can start the rotation of gold which can further lead to decrease in import.
Therefore, it will follow vice-versa of the trend as it was depicted in the case study. 3. CONCLUSION

Therefore, in order to improve the present condition of gold, it is very important to keep the gold rotated so that it is not locked up in the vaults anymore and perhaps used in such a way such that it introduces more and more wealth for the investors, reduces import of the commodity, less of smuggling, corruption, unleashes the hidden potential of Indian gold market and finally creates more employment opportunities all around which shall also help in increasing the productive capacity of the economy. 4. REFERENCES

[1] An Introduction to the Indian Gold Industry Published by Virtual Metals Research & Consulting Ltd and Grendon International Research Pty Ltd.
[2] http://www.assocham.org/arb/general/Indias_Gold_Rush_Its_Impact_and_Sustainability.pdf
[3] Gold in the Indian Economic system By Y. V. Reddy
[4] Gold Demand Trends Q3 2013, 14 Nov, 2013
[5] https://www.gold.org/jewellery/markets/india/
[6] Reserve Bank of India Annual Report 2012-13
[7] http://www.bullionstreet.com/news/my-gold-plan-targets-indias-huge-unorganized-gold-markets/3564
[8] Surveying-the-Indian-Gold-Loan-Market, A cognizant 20 20 insights.
[9] Central Bank diversification Strategies: Rebalancing from the Dollar and Euro
[10] India's Gold Rush by C.P. Chandrashekar
[11] Report of the working group to study the issues related to gold imports and gold loans NBFCs in India.
[12] WGC Stratstruck Case Study