Mobilising India’s domestic gold

Gold holds a revered status in Indian culture, symbolizing wealth, prestige, and tradition. With estimates suggesting that Indian households, high-net-worth individuals, and institutions (mainly religious bodies such as temples) collectively possess over 25,000 tons of physical gold, valued at approximately $19 trillion, it is evident that gold plays a significant role in the nation's economy.

Over the past 25 years alone, India has imported approximately 17,500 tons of gold @ 700 tons per annum of official gold imports, with exports limited to jewelry and medallions / coins, constituting just 10% of imports. This substantial accumulation of gold within the country has sparked discussions among analysts and industry experts about the potential benefits of mobilizing this domestic gold reserve to reduce dependence on imports and save billions in foreign exchange – imagine, if all of the 25,000 tons is mobilized, then India does not need to import gold for 35 years!

When experts suggest gold mobilization, they invariably mean that current holders of gold should sell their gold. And herein lies the challenge.

Household gold and jewellery often acquired through generations and lacking proof of purchase, faces tax and regulatory hurdles when individuals attempt to sell them. Emotional attachment further complicates the matter, making it difficult to persuade individuals to part with their gold unless faced with dire financial circumstances. Additionally, households face the unscrupulous practices of traders where they claim the purity of gold to be lower than what the holder believes, thereby entailing a significant loss.

On top of it, when jewellery is sold, the monetary value of stones is unknown and there are no benchmarks available (except in the case of relatively large pieces), thereby not fetching any significant value to the seller. The weight of wax in jewellery would of course result in no value. And in all cases, the making charges (ranging from 0.5% to 20% depending on the type of jewellery and where it was purchased) paid previously for procuring it would be lost completely. The buying/selling spread would entail additional costs.

Then comes that part of gold that is held by high/ultra-high net worth individuals where average quantities held could be substantial. However, requirements for proof of purchase and source of funds used to procure those quantities, both from regulatory and tax perspectives, could and does prevent those holdings to be mobilized as a mainstream activity.

What does it leave us with? The institutional gold of course is typically in possession of religious bodies such as temples, and provides a significant opportunity for mobilizing gold.

Temple gold holdings, estimated at over 5,000 tons ($3.75 trillion) and potentially as high as 10,000 tons, represent a viable avenue for gold mobilization. Unlike individual holdings, temple assets are not subject to taxation or source of funds requirements, easing the process of mobilisation. By partnering with trusted and accredited gold refineries within the country, temples can convert their diverse gold holdings into standardized, pure gold bars, facilitating ease of sale or investment.

Once converted into pure gold bars, temples have the option to retain the gold as assets or sell a portion to banks or traders. Proceeds from sales can be invested to generate regular income (for example, from fixed deposits), while retained assets can be lent to banks to earn interest, thereby reducing storage & insurance costs and preserving ownership. Banks in turn would make their profits by lending to gold & jewellery industry at a higher interest rate than they pay to temples – the usual bid/offer spread.

To the extent temples sell their gold, it would reduce India’s gold imports and help preserve precious foreign exchange. And for the part that is lent out, it would foster a domestic gold loan market, reduce Indian banks’ dependence on overseas gold borrowings and bolster India’s economic self-sufficiency. A win-win situation for all!

Going forward, institutions such as temples have an opportunity to create a digital platform to receive gold donations which would not only make it easier, efficient, and economical for themselves, but also help the entire eco-system become seamless.

In short, of all gold mobilization efforts, a focus on institutions such as temples appears to be the most logical next step. Policymakers may also consider providing amnesty to households and individuals from regulatory requirements related to proof of purchase and source of funds, enabling seamless integration of these assets into the mainstream economy, which would further boost gold mobilization efforts.

In conclusion, the mobilisation of India's domestic gold reserves presents a unique opportunity to enhance economic resilience and reduce reliance on foreign imports. By focusing on institutional gold, particularly gold held by temples, India can leverage its vast gold reserves to stimulate economic growth, foster financial innovation, and establish a robust gold industry infrastructure for the "New India." Through collaborative efforts between policymakers, religious institutions, and the private sector, India can unlock the full potential of its domestic gold reserves and chart a path towards prosperity.