Making India a Gold Price Fixer
Despite being the world’s second largest importer and consumer of gold for many years, with an annual import of 700-900 tonnes valued at $35-40 billion, India is not the one setting the prices, but only the one who takes the prices. Gold prices are largely determined in the London and New York markets.
In this context, the Prime Minister’s statement at the inauguration of the India International Bullion Exchange last Friday that it was time for the country to become a market maker takes on its full significance. Although a large import volume alone cannot give us much leverage globally, this grand vision is achievable if we overcome several challenges.
Predictable policy: A stable, predictable and long-term political environment is essential. None exist today. In Indian political circles, gold is considered a demerit commodity. Policies, tariffs and tariffs change regularly, creating uncertainty among stakeholders.
Transparent physical market: The physical gold market is anything but transparent. Even though the gold jewelery trade is becoming more and more organized, we still have a significant unorganized market. More importantly, we need to comprehensively tackle the gray market to minimize its role, if not eliminate it.
Robust quality assurance: It is a key element in the trade of high-value gold jewelry. Under-caration is the scourge of the market. Strict enforcement of consumer protection law is necessary. Hallmarking infrastructure must expand dramatically and certification must be affordable.
Solid and flexible infrastructure: As important as the physical infrastructure like analysis, transport and the vault is the soft infrastructure which covers the flow of information, the infusion of technology and the development of skills through the training of artisans. With the market still largely unorganized, data capture and dissemination is more anecdotal. In the absence of scientifically captured data, speculative elements often benefit from “information arbitrage”.
Integral part of the global value chain: Although a major importer and exporter of gold jewellery, India is strictly not an integral part of the global value chain. There are trade restrictions. Export of gold bullion is not allowed while import is only allowed through designated agencies notified by RBI or DGFT.
Currency convertibility: This could be an obstacle for India to become a price setter in the global gold market. Although remittances out of the country have been more liberal in recent years, restrictions remain. The rupee is not convertible into capital which can be dissuasive.
Strong regulatory oversight: Gold faces multiple regulators, and oversight is dispersed among many institutions, including the Ministry of Finance (tax issues), the Ministry of Commerce (foreign trade policy), the Ministry of Consumer Affairs (quality, RBI (Financial Institutions) and SEBI (Derivatives) Often a siled approach marks regulatory oversight We need much greater coordination and clarity in policy making and rule implementation .
Although these are “necessary” conditions, they may not be “sufficient” conditions to achieve the objective. The question of the country’s perception, the ease of doing business, the confidence of international financial institutions and investors in the long-term stability and sustainability of business will also come into play.
(The author is a political commentator and commodity market specialist. Opinions are personal)
July 31, 2022
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