As the country moves towards creating a spot gold exchange, markets regulator Sebi's whole time member G Mahalingam on Wednesday suggested routing all the imports of the precious metal through the exchange ecosystem in the future.
Such a "funnelling" would ensure that gold monetisation takes place right at the source as the metal enters the country, he said while addressing a conference organised by industry lobby Ficci.
However, he also noted that the issue has not been dealt with in the papers floated by Sebi.
In the Budget for FY19, the government had mooted the idea of having regulated gold exchanges and followed it up by announcing Sebi as the regulator in the Budget presented in February 2021.
The regulator has floated a consultation paper on the broad contours of such an exchange.
"Should we move over to a system where all imports into the country will be routed through the EGR (Electronic Gold Receipt)? This is not a theoretical question. This is a very practical question," Mahalingam said, adding that other countries with gold markets like Turkey and China already have such a system.
"Any gold entering into a country beyond a particular purity level, anything beyond 995, will have to come through the exchange ecosystem, it will not be outside the ecosystem… which means all the imports are going to be funnelled into the exchange ecosystem, which means it gets converted into a financial product," he noted.
Such a system will be a "very big advantage" as the aspiration of gold monetisation takes place as soon as the metal enters the country.
According to him, the experience of Turkey and China can serve as a good example for India as it goes about establishing such a market.
At present, Indian imports about USD 35 billion worth of gold every year and the introduction of the market mechanism can help reduce the pressure on the current account deficit as well, he said, adding that the external sector balances of Turkey have benefited through the spot exchange for gold.
The government would also have to have a relook at the laws governing tax treatment to create a "conducive taxation regime" given the positive impact which such an exchange can have on the overall scheme of things, he said.
India imports around 800-900 tonnes of gold per annum and over 25,000 tonnes of gold is estimated to be held by countrymen, Mahalingam said, adding that all the previous efforts at making the gold useful for the economy by taking it out have not succeeded.
Further, he said that such an effort is essential because despite having such high demand for gold, India is a price taker in the international market and not a price maker.
India lacks a high quality infrastructure, including the one for transport, storage and refining, for gold and will have to take care of such impediments, he pointed out.
Presently, Sebi is studying the feedback and comments it has received on its consultation paper to formulate the policy.
It is completely open on whether to have a single exchange or multiple ones, he said, adding that all the stakeholders need to sit together and decide on the way forward for establishing the mechanism in the quickest possible way.
Mahalingam said he is personally in favour of having a smaller trading lot going down to even one gram but given the costs involved, the minimum size for delivery has to be kept higher at 50 or 100 grams.
There is also a need to homogenise the commodity and fungibility is a must, and that refinery of origin should not matter once the purity of the metal has been established, he said.
Some thought also needs to be paid on how to take care of the gold which will be lying in the vaults and how to make best use of it from an income generation perspective, he added.
Photograph: Heinz-Peter Bader/Reuters