For all the laudable recommendations (yes, Indians
using their own gold to fund their own gold jewellery industry is OK) in
the WGC & FICCI's Why
India needs a gold policy, I think it fails to articulate a compelling
case for the only thing that matters to the Indian Government - reducing gold
imports (ie currency leaving the country).
Stating it simply, imports will only be reduced by the amount of gold tied
up in manufacturing inventories, thereafter Indian's net accumulation urges
will have to be satisfied by imports again. The failure of the report to
identify the size of manufacturing inventories means the size of import
substitution cannot be quantified, denying the report the sort of hard
numbers that could attract policy makers' attention.
First some facts. The report mentions 22,000 tonnes of gold held in India.
Yearly consumer demand is around 800t and WGC's global stock estimates put
industrial/manufacturing inventories at around 10% of total gold stock. So
that would work out to:
Physical Gold held by Indians - 22,000t
Physical Gold held by Manufacturers as work in progress - 2,400t
Yearly demand/addition to stock - 800t
Note that Indians are net accumulators of gold (the report notes they
spend 8% of their income on jewellery and coins). This means any mobilisation
of the 22,000t into bank gold savings schemes does not mean
that those people will not buy more gold. All they are doing is changing the
way they hold their existing gold savings; they will still
want to add to their existing savings (in aggregate). Any
mobilised/recycled gold is just sold back to others who don't want a bank
gold savings scheme - the total amount of physical gold in the country stays
the same, it is just that some are now holding bank gold savings schemes.
Lets say the WGC's proposals are so successful that they manage to
mobilise 800t a year. So Indian banks don't have to import gold and can
instead loan the mobilised gold to manufacturers who then transform it
and sell it (their total holdings stay the same). This is how the gold
"balance sheet" of India looks after this first year:
Indian Physical Gold asset - 22,000t
Indian Gold Savings Schemes asset - 800t
Bank gold liabilities to Indians - 800t
Bank gold asset (loans) to Manufacturers - 800t
Manufacturer liability (borrowings) to Bank - 800t
Manufacturer Physical Gold asset - 2,400t
After three years of this we would have this situation:
Indian Physical Gold asset - 22,000t
Indian Gold Savings Schemes asset - 2,400t
Bank gold liabilities to Indians - 2,400t
Bank gold asset (loans) to Manufacturers - 2,400t
Manufacturer liability (borrowings) to Bank - 2,400t
Manufacturer Physical Gold asset - 2,400t
Now what happens in year 4? The banks get another 800t from Indians but
they can't loan it to manufacturers as the manufacturers have all the gold
financing they need. The manufacturers would be happy to buy
the gold from the banks but this would leave the bank with short gold
position. If the bank sold the mobilised gold they would
have to use the cash to buy replacement gold. As Indians are
not net sellers (in aggregate) the banks' only option is to buy gold
overseas, but in doing so they send currency out of the country, which is
what the Government is trying to prevent.
So gold mobilisation is probably only good for a few years worth of gold
import substitution and thereafter the Indian Government is back to its
"problem". One could add another year or two if the Indian export
jewellery industry expanded based on the other recommendations (WGC estimates
exports could increase five-fold - but that doesn't translated to work in
progress inventory increase of the same size as manufacturers would just
increase their inventory turnover). But in the end mobilisation is a
temporary solution. Maybe that explains the lack of hard numbers in the
report.
It is not like the WGC and FICCI could not have worked out the amount of
gold tied up in manufacturing - a November 2013 FICCI report in conjunction
with AT Kearney (All
that glitters is Gold: India Jewellery Review 2013) has a lot of very
detailed numbers on the jewellery industry and so working inventory estimates
obviously would not be difficult to obtain. My only conclusion is that it was
a deliberate strategy of the WGC to avoid putting numbers to the real import
substitution potential.
Given that many of the recommendations would make it easier to invest in
gold both in jewellery and coin/bar, once the mobilisation import
substitution ran its course the result would actually be increased Indian
gold demand compared to doing nothing and leaving the industry in its current
less than optimal state. Maybe I'm too cynical thinking that the WGC knows
this and deliberately allows the report to imply to less savvy policy
makers that it solves the "gold problem", in which case you
certainly don't want to have any hard numbers focusing on real physical gold
and currency flows.
In my opinion the report does spin the 5006 person (not much in a country
that size) survey results quite hard. The survey seems heavily skewed to
urban (only 2.44% employed in agriculture), but I don't know what the general
population distribution is, and nor does the report indicate if their sample
is representative of India in general. The report notes that "more
than 49 per cent of respondents said they would be willing to deposit their
gold to earn interest while a further 12 per cent said they might do so.
Moreover, 72 per cent said they were happy to receive different gold from
their initial deposit." OK, so (49 +12) x 72 = only 44% who would
actually go with a mobilisation scheme that could recycle gold.
The report also noted that "more than a third of respondents
would be willing to deposit 25-50 per cent of gold in their possession"
(didn't indicate the other respondents % they would deposit). Once you get
the 44% then apply a third then apply 25% it would look to me that we are
talking about a much smaller amount of the 22,000t that would actually be
mobilised, certainly less than the report implies (note that the report says
that Turkey only "monetised around 300 tonnes of gold").
How much gold Indians would be willing to mobilise is questionable,
especially considering the following from the November 2013 FICCI report: "Unlike
other financial investment options, many retail transactions in gold can
still be done in cash without any documentation. This provides an easy route
for investing unaccounted (black) money."
Probably the best source of mobilised gold would be the temple trusts, which
the earlier FICCI report says "it is estimated by various sources
that about 1800-2000 tons of gold is present with the temple trusts in the
country" That would probably fund the gold jewellery industry.
