By Everett Millman – Gainesville Coins ……
About five years ago in India, the newly-elected government of Prime Minister Narendra Modi continued with the previous administration’s new legal measures designed to ease the imbalance of gold flows into the country. Demand from Indian households (many of them rural farmers) brings hundreds of tons of gold across the border each year, but very little of it ever leaves.
This largely one-way inflow of gold bullion places a strain on India’s trade deficit. So lawmakers devised an “80:20 scheme”, wherein 20% of all imported gold had to be re-exported. In theory, this would force domestic bullion suppliers to repurpose some of their gold as value-added products such as jewelry, helping to reduce the trade imbalance.
While the 80:20 scheme was relatively unpopular on its own, the policy now appears to have lived up to the label “scheme” in the worst way possible.
Gold Monetization Mission
The scheme was one among various anti-gold policies supported by PM Modi–along with much of the leadership in both of India’s largest political parties.
To be fair, the Bharatiya Janata Party (BJP), which Modi currently heads, wouldn’t characterize its stance as “anti-gold”. They will admit they are trying to monetize gold: Another unpopular suite of policies goes by the not-at-all-ominous name of Gold Monetization Scheme (GMS).
GMS has come under heavy criticism, leading to recent revisions to the law. The general idea is to get more of the public to place its physical gold into the financial system, such as with special bank accounts.
A large majority of the rural population in India doesn’t have access to basic banking services. Families often hold a considerable amount of their wealth in gold jewelry. Many temples have also hoarded ample amounts of gold, made as offerings, that the government would like to see “financialized”; i.e., under the management of some banking concern.
However, the country’s financial industry and infrastructure are still not fully mature–even more so than is the case in China. India’s commercial banks are barred by law from operating bullion trading desks.
That’s beginning to change, albeit slowly.
By monetizing all of those gold savings by households, the Modi government hopes to bring the world’s fastest-growing economy into the developed world more quickly.
Whatever the merits of these policies, it now appears that the 80:20 scheme in particular was, to put it charitably, poorly executed. It has increasingly drawn accusations of graft, corruption, and scandal since its implementation in 2013. Some in the Indian press have even taken to branding it an outright “heist.”
This will likely be counted as another policy failure after the “Modi Shock” of late 2016, when the prime minister demonetized large-denomination banknotes, causing a lasting disruption in India’s cash economy.
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