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Kisan Vikas Patra, gold curbs: Old, bad ideas

By BS Bureau
November 20, 2014 11:57 IST

Either the government is not as concerned about retrieving black money as it claims, or it genuinely believes that the demand for gold is entirely from black-money holders.

Gold jewelleryOne of the big takeaways from the recently released data on India’s merchandise trade is that gold imports have, once again, skyrocketed.

In October 2014, over $4 billion worth of gold was imported, as opposed to about $1 billion in the same month a year ago. This increase in total value is in spite of a decline in the price of gold.

In terms of tonnage, the increase is even more stark — 120 tonnes, as opposed to 24 tonnes in October 2013. This has significant consequences for India’s trade deficit.

However, the response is even more worrying.

The government is doubling down on existing 'temporary' restrictions on the import of gold. Some were introduced under the last administration, and had a transitory effect, reducing gold imports through the official channel.

Clearly, they are no longer effective -- and, worse, gold smuggling to evade them is up, too.

The only real answer to a gold fixation is to provide alternative stores of value, or forms of investment.

Another method of controlling gold demand is called for.

But the government seems to be short of ideas, and is only retreading old ones.

The failure to think innovatively is visible also in the relaunch by the finance ministry of Kisan Vikas Patras, or KVPs, a scheme that the previous government had abandoned in the wake of criticism that it facilitated laundering of black money.

From the announcements the government has made so far, it seems these instruments are not tied to any individual.

It is not clear in what manner the know-your-customer norms will be enforced, specifically when these instruments are likely to be freely transferable. Nor does it appear that there is any limit on investing in these instruments.

Indeed they have traditionally served as a method of laundering black money.

That was why they were de-emphasised and then withdrawn. By some calculations, the interest rate on offer in such KVPs is below many other alternatives, such as fixed deposits.

It is far from clear, therefore, why anyone interested in formal finance would invest in these instead of fixed deposits unless it was to turn illegitimate cash into a transferable instrument.

It is deeply puzzling as to why a government that claims to be taking tough action against black money would re-introduce an instrument that was seen as the best way of carrying around and laundering black money.

Either the government is not as concerned about retrieving black money as it claims, or it genuinely believes that the demand for gold is entirely from black-money holders -- and the latter is not borne out by most of the available facts.

In the end, the only answer to an insatiable demand for gold as a financial instrument is to deepen and strengthen the real financial system. More people should be able to access formal finance, and they should receive interest rates and returns that make holding black money unattractive.

Thus, the prime minister’s Jan Dhan Yojana, which aims to open bank accounts for India’s citizens, is a commendable initiative.

Yet, as was reported in this newspaper on Wednesday, only a quarter of the accounts opened under the scheme have any money in them at all.

Rather than turn it into a photo-opportunity, as happens too easily, the government should work a little harder on ensuring that every step of the chain of formal finance -- the depositor, the banking correspondent, the bank -- is properly incentivised right from the start.

Only then will the plan be successful and sustainable.

BS Bureau
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