Warrier's Collage July 29, 2021 : Gold Management

Welcome to Warrier's COLLAGE On Thursday July 29, 2021 Discovery of Gold https://wap.business-standard.com/article-amp/international/how-the-gold-rush-of-the-19th-century-shaped-the-modern-day-world-118040400311_1.html (Yellow Metal that changed World View) Good Morning As some new areas of common interest are being covered, some articles on Spirituality/Mythology/Faith have not been included today. Already some readers are finding Collage too lengthy. To help them, major portions of long articles/responses are shifted to the end @ H. Nice Day M G Warrier A Select Responses 1) Suryan Ex-Canara Bank Coimbatore Snippets from Ramayana about Urmila's plight and Ravana's final words of wisdom, both are interesting topics..... Failure to abide by Dharma (even after knowing what's one's Dharma ) and at the same time succumbing to the lustful desires, knowing pretty well that it is Adharma, are two grave mistakes that brought about Ravana's fall...and that's the life's lessons that he imparts as his advice to Rama. Well narrated. 2) Dr G Sreekumar Look forward to future instalments on cooperative banks and societies, especially in the light of the Karuvannur bank episode in Kerala. There is an imminent run on these societies that could break out any time. But, when these societies were masquerading as banks, hoodwinking people into the comfort that their deposits are insured and are with institutions regulated by the Reserve Bank, what was the Reserve Bank's role? Do you have any idea whether any action was taken as earlier? (Well-framed question. I don't have a direct answer. Hope someone will try to find out answers. Adding Section 56 to B R Act was a half-hearted measure. Was never implemented in spirit. Around 1970, Shri A P Mukundan Rural Credit Officer (Temporary) with his background in the State Government Cooperation Dept had prepared a report on the kind of mismanagement prevailing in primary co-op credit societies (then some of these were known as "Rural Banks" and many of them were doing well) in Kerala doing banking business. No effective action was taken. Now the proportion of malpractices have multiplied manifold. All of us live on hopes. I have hope in Kerala Bank which is another experiment which can also fail for the reasons which scuttle measures affecting the vested interests of some-Warrier) B Current Affairs Gold and Jewellery 1) Export https://www.ibef.org/exports/gems-and-jewellery-export.aspx The Indian Gems and Jewellery sector is one of the largest in the world, contributing around 29% to the global jewellery consumption. The sector employs over 4.64 million employees and is home to over 300,000 gems and jewellery players. The sector contributes 7% to the Gross Domestic Product (GDP) of the country. 2) Kerala : Gold Smuggling Customs for a closer look at gold industry: https://www.thehindu.com/news/national/kerala/customs-for-a-closer-look-at-gold-industry/article26226591.ece A February 2019 media report : "The gold rush to the State continues with the Customs seizing 319 kg of the yellow metal valued at ₹87 crore in over 881 cases, including those at the four international airports in the State, till the end of January in the current year. The figures could be even more staggering by the time this financial year draws to a close, as more hauls are recorded regularly. Conservative estimates put gold smuggling into the country at 200 tonnes annually, out of which 78-80 tonnes reach Kerala directly or indirectly. In comparison, the legitimate gold importing and recycled gold in the country is estimated at a minuscule 18 tonnes. “Import of gold by banks by deferring duty payment has emerged as a major area of concern as this gold is supposed to be exported after value additions and may, in turn, end up smuggled in,” Sumit Kumar, Customs Commissioner, told The Hindu." C Collage in Classroom Gold Management 1) Introduction Gold Management needs a makeover : The Hindu Business Line (April 13, 2013) https://www.thehindubusinessline.com/opinion/gold-management-needs-a-makeover/article20449587.ece1/amp/ The management of gold reserves has been a subject of intense debate and controversy. The Budget 2012-13 has proposed a doubling of customs duty, while the Reserve Bank has expressed its concern about rising imports of gold and other precious metals. In March 2011, the World Gold Council identified India as a key driver of global gold demand. It made the following observations: (Continued at H2) 2) Gold Refining https://www.gold.org/about-gold/gold-supply/gold-refining 2) India's Domestic Gold Stock https://www.businesstoday.in/amp/latest/economy-politics/story/indian-households-have-stocked-up-to-25000-tonnes-of-gold-world-gold-council-202147-2019-05-21 This is a May 2019 article. Excerpts : Domestic demand is expected to further improve in the June quarter owing to traditional wedding season buying and the Akshaya Tritiya festival. Expectations of a normal monsoon this year also augurs well for the rural economy and gold demand. Jewellery is reportedly likely to be main driver of Indian demand but the consumption of bars and coins is expected to be higher in 2019 than in the previous year. Although the government has experimented with multiple ways to reduce the domestic demand for physical gold, be it ETFs, SGBs, gold mining funds, gold fund of funds (FoF) or digital gold, the preference for physical gold does not wane. (Continued at H1) D Books by M G Warrier "India's Decade of Reforms"* (Notion Press Chennai, 2018) Preface This book has depended mostly on articles written by me for magazines and newspapers during the last four years. The book is in six sections. First two sections cover issues in which Reserve bank of India has mandated roles to play as banking regulator and manager of currency. After a recap of RBI’s evolution as a unique central bank playing a major role in the country’s economic development, Section I reviews the recent changes in monetary policy management. The stress is on the need for convergence of fiscal and monetary policies to promote overall economic development of the country. Section II has three chapters on “Note-Ban and After” dwelling in some detail into the rationale behind withdrawal of high value currency notes from circulation, the impact of the measure and finally takes a look at the resilience of Indian Banking System despite neglect from owners and exploitation by the rich and the powerful. Section III in four chapters gives a birds eye view of the emerging Multi-Agency System in the financial sector. Section IV examines Stressed Assets in Indian Economy and how GOI and RBI together are handling the challenges arising from them. Section V carries some essays opening debates on some development issues or issues affecting development. Section VI has only one chapter under ‘Prologue as Epilogue.’ This is an adaptation from my article “Eradicating Corruption: Power to The People” published at moneylife. in on September 25, 2012. M G Warrier November 24, 2017 *Amazon Link : India's Decade of Reforms : Reserve Bank of India at Central Stage https://www.amazon.in/dp/B079P56273/ref=cm_sw_r_apan_glt_4YQ35XTP0Y0HWT9KA8M1 My other books on Banking and Finance include "Banking, Reforms and Corruption" (2014, now available in eBook format titled "Chasing Inclusive Growth") and "Restoring TRUST in Governance" (Notion Press, 2020)-Warrier E Position Paper on Gold Management in India (2019) : M G Warrier Excerpts : Some of the loud thoughts in this paper may sound unconventional and therefore politically unacceptable in the present scenario, but the prayers of 99 percent Indians who do not own more than 20 grams of gold per family are behind me, to make it happen. (Text at H2) F Leisure 1) Enlightenment* Joke of the Day I became a bit spiritual this morning. So closed my eyes and sat still and started thinking: 1. Who am I? 2. Where did I come from? 3. Why have I come? 4. Where to go? . . Then came my wife's voice from the kitchen, *"You are lazy number one" "Don't know from which world you have come..." "To spoil my life..." "Get up and go to take a bath" The complete knowledge of all four questions was attained with complete ease and complete knowledge and marked the completion of my spiritual journey! *Received from Dr T V Surendran Mananthavady 2) Raja Bhoja's Court* An interesting anecdote regarding king Bhoja, whose court-poet was Kalidasa. Bhoja was a great patron of Sanskrit and himself a poet. It was a common saying that in the kingdom of Bhoja, everyone was a poet. An Ambassador from another kingdom happened to be there but said this was an exaggeration and was not possible. So he went out into the kingdom and far away found a weaver, working from morning to night to earn his living. He brought the weaver to the court and in front of the king asked him whether he could compose poetry. The weaver replied in all humility: काव्यं करोमि न हि चारुतरं करोमि यत्नात् करोमि यदि चारुतरं करोमि l भूपालमौलिमणिमण्डितपादपीठ हे भोजराज कवयामि वयामि यामि ll 'I compose poetry but not very well. If I make an effort I may be able to improve. O Bhoja, whose footrest is encrusted with jewels from the crowns of kings, I compose poetry, I weave and with your permission I am going.' The shloka of the weaver is charming in its beauty and its humility, and its final play with the three words 'kavayami, vayami, yami' where each subsequent verb is obtained from the previous one by deleting the first syllable. *Received from V N Kelkar G Quotes on Physical Gold https://www.physicalgold.com/insights/15-famous-quotes-about-gold Like : "Gold medals aren't really made of gold. They're made of sweat, determination and a hard to find alloy called guts.” – Dan Gable Former American freestyle wrestler and coach Dan Gable talks about the real ingredients required inside a human being to win a gold medal. With greater introspection, we realise that it isn't just the gold medals won in a tournament that he is referring to. It's every achievement in life, and nothing good comes easy. Source: Goodreads.com H 1) Continued from C2 Even its gold monetisation scheme (GMS), designed for those who have gold lying in lockers and cupboards, has failed to really take off. This is despite the interest rates in the range of 0.5-2.5% that one can earn, which is exempt from capital gains tax. The capital gains on value appreciation are also exempt from wealth tax and income tax. The total mop-up through all the above-mentioned schemes - introduced as part of the government's broader efforts to curb non-essential imports and thereby contain trade deficits - reportedly represents a meagre 2% of the country's annual consumption. There were only 12 gold ETF schemes as of April 2019 with the total number of investors being 3,19,863. Moreover, the total AUM of gold ETFs has fallen by 60% between 2013 and 2019. However, Arvind Sahay, Chairperson, India Gold Policy Centre sees silver linings. "The negative trend in gold ETFs seems to be reaching its trough," he told Business Today. "Given impending risks in the global economy, gold ETFs have the potential to see net inflows in FY20 after six years." 2) Continued from C1 At more than 18,000 tonnes, Indian households hold the largest stock of gold in the world. Gold purchases in India accounted for 32 per cent of the global total in 2010. The vast majority of the Indian population (70 per cent) lives in villages, which have traditionally formed the source of more than two-thirds of Indian gold demand. INDIA'S GOLD DEMAND The WGC research shows that by 2020 cumulative annual demand for gold in India will increase from the present level of 1,000 tonnes to more than 1,200 tonnes, or approximately Rs. 2.5 trillion, at 2011 price levels. Gold is a key factor in forex reserves management and assets of financial institutions. It is held in the form of jewellery, bullion, gold bars or coins by institutions and individuals and so on. The quantity of gold with religious institutions and households in India has never been assessed. According to one estimate, of the world's exploited stock of 140,000 tonnes of gold, WGC has estimated holdings of gold by Indian households at more than 18,000 tonnes. About 600 tonnes are held with RBI and an unestimated quantity is held by temples and religious institutions. The Government and RBI decided rather late, or in the last quarter of 2009, to increase the gold component in the country's forex reserves by about 200 tonnes (valued at over Rs 30,000 crore) by way of a purchase from the International Monetary Fund. MAKE GOLD TRADABLE While the overall stock position and central bank's holding of gold are not that impressive, our country imports around 800 tonnes of gold annually, which is no mean quantity. The deployment of this precious metal to the advantage of the nation makes for a sorry story. Gold should be restored its status as a store of value by making it tradable, secure and available in ‘paper' form, against actual stocks of pure and standard gold. It is high time gold is accorded the position it deserves in forex reserves management. The Centre could also consider an arrangement, through RBI or any other duly constituted authority, to trade in ‘paper gold', against genuine tradable gold stocks. Mutual Fund ETFs are no substitute for this. In India gold is popular for all wrong reasons. The fascination for this yellow metal as an ornament and as dowry has led to a reluctance among people to talk about gold in public. From the retail investors' point of view, unfortunately, Gold Exchange Traded Funds (ETFs) are yet to become popular and really tradable. Therefore, the common man is tempted to invest in ornament gold, which has several negatives such as difficulty in ensuring purity, making charges, security-related issues and inadequate liquidity. The infamous money-lender takes advantage of the helplessness of the common man by luring him with loans against jewellery at high rates of interest. He would offer unimaginably high amounts of loan against each 10 gram of gold, with the ultimate motive of robbing the owner (the pledged gold is sold or forfeited by the money-lender as the loan plus interest grows much beyond the real value of gold pledged in less than a year). This trend, hopefully, has been reversed with the recent RBI directive to follow prudential norms in regard to the loan-to-value ratio. INSTITUTIONAL CHANGE The time is ripe for authorities to think in terms of dedicated professional institutions at the regional/state level, which will handle gold from a banking angle. An apex body should be equipped with linkages for import and export of gold and gold products with borrowing and lending capabilities. States like Kerala have successfully intervened in other similar sectors like chits/ kuris and lotteries, which were also areas of exploitation by vested interests. Private players had to fall in line and function with discipline and self-regulation. Establishment of ‘Gold Corporations' with state participation could also be debated. Such an institution can act as a depository where the gold possession of individuals now in bank lockers and the pledged gold can find a safe shelter, provided the purity can be ensured, and the ‘Corporation' can find the resources and skill to deal in gold and retain the customers' confidence. (The author is former General Manager, RBI.) 3) Refer E Position Paper On Gold Management in India: Problems and Prospects M G Warrier “As a macroeconomist, I uphold the view that integrating gold with India’s broader economic vision is the touchstone for India’s gold policy and gold markets. The foremost is adopting ‘Make in India’ policy which should address unexplored gold stocks below the ground, optimal use of gold stocks in circulation, and mobilize gold holdings held by individuals in lockers and temples.” -Errol D’Souza, Director, IIM, Ahmedabad Some of the loud thoughts in this paper may sound unconventional and therefore politically unacceptable in the present scenario, but the prayers of 99 percent Indians who do not own more than 20 grams of gold per family are behind me, to make it happen. Perhaps India may be alone in the world to sustain the dubious distinction of grossly mismanaging an asset (read gold) the country has been holding for centuries in huge quantities, in multiple forms, and in various places. When the population starved and died as a consequence of bad governance or as victims of nature’s wrath, Indian rulers allowed use of huge quantities of gold (a) to be wasted for gold-plating of roofs, flag-masts, and statues and (b) to be held in underground vaults, hidden and unaccounted, as unproductive ‘assets’. RBI’s gold holdings It has to be said to the credit of those who drafted Reserve Bank of India Act, 1934 which came into effect on April 1, 1935, that the framers of the Act included appropriate provisions in the Act to give the respect it deserved, to the yellow metal. Original Act provisions mandated RBI to ensure that 40 percent of the value of currency issued was backed by gold bullion and sterling reserves. Of course, with the higher level of trust of people in the central bank emerging, this was reduced and from 1956, RBI follows Minimum Reserve System(MRS). Under MRS, the central bank has to keep a minimum reserve of Rs200 crore comprising of gold coin and gold bullion and foreign currencies. Out of the Rs200 crore, Rs115 crore should be in the form of gold coin and gold bullion. Public trust in RBI is reinforced by a strong Balance Sheet maintained by the Reserve Bank of India. When India faced a near crisis in meeting international payment obligations in 1991, it was the gold-holdings in the RBI’s vault that came to the country’s rescue. In January 1991, as India struggled to finance its essential imports, especially of oil and fertilizers, and to repay official debt, the Chandra Shekhar government knocked at different doors in the global financial system, which India considered friendly, for forex support.. India actually managed to get a bit of a breather with the first tranche of $755 million from the IMF, but that was too little. By mid-March 1991, global credit-rating agencies placed India on watch and by April, downgraded the country’s sovereign rating from investment grade to a notch lower, making it virtually impossible to raise even short-term funds. When all efforts to raise funds got stuck up with hurdles, some central banks and investment banks abroad, pointed to the fact that India had enough gold which could be utilized. Between July 4 and 18, 1991, the RBI pledged 46.91 tonnes of gold with the Bank of England and the Bank of Japan to raise $400 million. But as the economic situation improved, the government repurchased the gold before December the same year and transferred it to the RBI. Memories, sometimes haunt us, at wrong occasions. Post-1947, UK and US and world bodies controlled by them and their allies were very friendly with India when they felt that we are able to manage our affairs on our own and kept a safe distance when we needed them most. Hopefully, the time when other central banks and international bodies will be keeping their gold in the vaults of Reserve Bank of India is not far off. That day, we will again remember 1991 with a smile. After a long gap, RBI has added 208 tonnes of gold to the reserves during the last nine years. RBI purchased 200 tonnes of gold from the International Monetary Fund (IMF), under the IMF’s limited gold sales programme in 2009. “This was done as part of the Reserve Bank’s foreign exchange reserves management operations. The purchase was an official sector off-market transaction and was executed over a two week period during October 19-30, 2009 at market-based prices,” the central bank announced on November 3, 2009. Again, after a gap of almost a decade, during 2017-18, RBI has added 8.46 metric tonnes of gold to the country’s gold reserves taking the gold component in foreign exchange reserves to 566.23 metric tonnes. Even at this level, the gold component in the central bank’s foreign exchange reserves constitutes only 6.3 percent. The US has the highest percentage of gold reserves with Fed Reserves at 74.9. See Table 1. In the recent past, GOI and RBI have taken several measures to restore the respectable position of the yellow metal, much beyond its decorative worth. Table 1 World’s top 10 central banks having a substantial gold component in their foreign exchange reserves (2017) Serial No Country Gold Reserves (Tonnes) As % to Forex Reserves 1 US 8133.5 74.9 2 Germany 3381 68.9 3 Italy 2451.8 68.0 4 France 2435.7 62.9 5 China 1797.5 2.2 6 Russia 1460.4 15 7 Switzerland 1040 6.7 8 Japan 765.2 2.4 9 Netherlands 612.5 61.2 10 India 557.7 6.3 After independence, India continued to spend huge amounts of precious foreign exchange to procure gold for meeting the ever-increasing demand from the domestic jewelry industry. Errol D’Souza, Director, IIM, Ahmedabad in his note recorded in the 3rd Annual Report (2017-18) of the India Gold Policy Centre had this to say about gold management in India: “As a macroeconomist, I uphold the view that integrating gold with India’s broader economic vision is the touchstone for India’s gold policy and gold markets. The foremost is adopting ‘Make in India’ policy which should address unexplored gold stocks below the ground, optimal use of gold stocks in circulation, and mobilize gold holdings held by individuals in lockers and temples.” Long back, someone had stated that India is a rich country with poor people. That person was not talking about the ‘hidden wealth’ in this country. In reality, the unaccounted wealth (for the time being the reference is not to tax evasion) in the custody of individuals and organizations in the form of gold, jewelry, and real estate, waiting to be mapped and mainstreamed must be worth trillions of rupees. If we are able to create a national consensus and build public trust to mainstream and pool a part of such domestic assets, India’s dependence on external sources for our immediate development needs will come down drastically. This will be a challenge worth chasing. It is not comforting to see ‘fund mobilization drives’ to help flood victims in Kerala at the instance of governments abroad being organized to provide financial support to India when our own wealth idle in vaults here. Fortunately, responding to media reports about an offer of ‘aid’ from a friendly kingdom (UAE), GOI was quick in advising Government of Kerala to politely decline such direct offers from foreign governments simultaneously clarifying that there was no ban on receiving contributions for relief and rehabilitation work from individuals and organizations of NRIs abroad. The excerpts in Box 1 are from a media report (Source: The Hindu Website) about the Temple Treasure in Padmanabhaswamy Temple, Thiruvananthapuram. Box 1 Temple Treasure in Padmanabhaswamy Temple, Thiruvananthapuram Inventory of the treasure[edit] The Supreme Court of India had ordered an amicus curiae appointed by it to prepare an inventory of the treasure. Full details of the inventory have not been revealed. However, newspaper reports gave an indication of some of the possible contents of the vaults.[4] About 40 groups of objects were retrieved from Vault E and Vault F. Another 1469 groups of objects found in Vault C and 617 in Vault D. Over 1.02 lakh (102,000) groups of objects (referred to as articles collectively) were recovered from Vault A alone. According to confirmed news reports, some of the items found include:- · A 4-foot (1.2 m) high and 3-foot (0.91 m) wide solid pure-golden idol of Mahavishnu studded with diamonds and other fully precious stones.[7] · A solid pure-golden throne, studded with hundreds of diamonds and precious stones, meant for the 18-foot (5.5 m) idol of the deity · Ceremonial attire for adorning the deity in the form of 16-part gold anki weighing almost 30 kilograms (66 lb) · An 18-foot (5.5 m) long pure-gold chain among thousands of pure-gold chains · A pure-gold sheaf weighing 500 kilograms (1,100 lb) · A 36-kilogram (79 lb) golden veil · 1200 'Sarappalli' pure-gold coin-chains encrusted with precious stones weighing between 3.5 kg and 10.5 kg · Several sacks filled with golden artifacts, necklaces, diadems, diamonds, rubies, sapphires, emeralds, gemstones, and objects made of other precious metals · Gold coconut shells studded with rubies and emeralds · Several 18th-century Napoleonic-era coins · Hundreds of thousands of gold coins of the Roman Empire · An 800-kilogram (1,800 lb) hoard of gold coins dating to around 200 BC [8] · According to varying reports, at least three if not many more, solid gold crowns all studded with diamonds and other precious stones · Hundreds of pure gold chairs · Thousands of gold pots · A 600-kg cache of gold coins from the medieval period While the above list is on the basis of reports describing the July 2011 opening (and later) of Vaults A, C, D, E and F, a 1930s report from The Hindu mentions a granary-sized structure (within either of vaults C or D or E or F but not Vault A) almost filled with mostly gold and some silver coins.A. Srivathsan (June 6, 2013). "When the vault was opened in 1931". The Hindu. Retrieved 27 November 2015. Future course I would like to conclude this article by repeating a slightly modified version of the concluding paragraphs of my own article in this magazine on the same subject written some 3 years back: Reserve Bank of India should counsel GOI to understand the significance of the treasure in the form of gold stock with institutions and individuals lying idle in the country. As a short-term plan, concrete measures should be initiated for putting at least some 20 percent of the domestic gold stock to productive use in the next 5 years. This will reduce the country’s gold import bill considerably. This can be achieved by: · Making a realistic assessment of gold stock remaining idle in the country · Providing incentives to holders of gold stock to properly account for the stock with them · Making gold deposits with banks remunerative · Introducing gold-backed financial instruments which are not dependent on imported gold (The tiny instruments now available in the form of Gold ETFs, gold coins and Sovereign Gold Bonds are indirectly dependent on import and have not attracted significant investor-interest) · Quickly arrange for infrastructure, technology support and linkages for gold refining and certification facilities of international standard · RBI and GOI could consider even deficit financing for the procurement of domestic gold as this could herald the emergence of a ‘Golden Era’ in the country’s history. **** **** ****