1. Indian gold-market policy
Approach note
November 2016

2. 1.
Savings or Luxury

3. The traditional belief about Indian gold demand
Demand is rural
Rural income is primarily agricultural
Consequently monsoons dramatically impact gold demand
We have always been aware of how much gold India consumes
And we have always known the form in which gold is consumed
But do we really know which sections of India consume gold
And do we really know why Indians consume gold?

4. Widely different views on who consumes gold in India today
Economic survey of India
The ‘rich’ consume most of the Gold - top 20 per cent of population account for roughly 80 per cent of total consumption
NSS 68th survey of consumption patterns in India
Gold is more than 1% of monthly consumption only for the 10% richest rural consumers, while it is consistently a larger share of the urban consumers spend
GFMS Gold survey 2016
Indian households dependent on agricultural activities contribute to 35% of annual gold demand, and are highly sensitive to monsoons
NSE- IFMR survey 2016
Gold is the second largest asset for rural households, comprising 45% of total savings for rural households
With increasing urbanization, has the definition of “Rural” changed? 1 2
GFMS Gold survey 2016

5. Illustrative of FICCI survey2 IFMR research in rural India
In addition to consumption, the traditional role of gold as a savings vehicle is clear
CONSUMPTION
INVESTMENT
SAVINGS
Illustrative of FICCI survey2
IFMR research in rural India
Safe asset
76.62%
For adornment
52.54%
Save for future
23.05%
Consumer surveys vary from gold’s role as luxury or saving but not investment
Financial instruments do not feature as a significant tool for investment in rural India 1 2

6. Sovereign Gold bonds are still in their infancy
Whereas there may be an investment benefit, the driver for Gold is not ‘conventional’ investment
CONSUMPTION
INVESTMENT
SAVINGS
Gold backed financial products represent only 0.2% of the value of India’s stock of gold
Sovereign Gold bonds are still in their infancy
Period
Bond uptake1
Imports 2
Nov 2015
0.916
77.97
Jan 2016
3.071
42.46
Apr 2016
1.128
40.11 1 2

7. Independent of what the policy focus has been, gold has been steadily viewed from a policy perspective as an unproductive asset class
Economic survey 2012: “There is scope to discourage unproductive imports, like gold and consumer goods, to restore balance”
Economic survey 2016: “Gold is a demerit good. There is a huge subsidy of 25%..about 98% of the subsidy accrues to the better off….”
Gold continues to be a strain on current account deficit.
Managing gold imports is a challenge due to the difficult tradeoff between controls and smuggling of gold & associated revenue loss

8. Policy is increasing controls on gold
Increased Engagement
Restrictions
Liberalisation
Restrictions/controls
1950
1996
1997
2012
2013
2016
Fully restricted policy
Banks freely engage
Import of Gold
Removal of restrictions on derivatives
Decrease imported coins
80:20 introduction and removal
Increase in customs duty from %
1% Excise on jewelry

9. Tax and policy considerations2.

10. Government decision making operates at two levels: revenue and policy
Taxation: Ministry of Finance
GST 1
Budget 2
Determined with inputs from CEA
To be decided in November 2016
Will set GST
Finance ministry, CEA, Tax research Unit
To be decided in January 2017
Will set Customs Duty (determined in part by GST)
Policy:
Purview of GOI, various bodies
Gold policy for India 1
RBI 2
Various dept:
DGFT, CBEC, CBDT 3
Multitude of trade bodies
No single voice
Difficult to please all
Export/import
Financing
Banks vis a vis gold
GMS & SGB
Export/import
Foreign trade
Direct taxation
Excise
World Gold Council 2015 report

11. Taxation: Ministry of Finance Purview of GOI, various bodies
What should be the ask?
Taxation: Ministry of Finance
Alignment with global economy implies high GST on jewelry – being a luxury good and low/nil customs duty on gold – the latter being a financial product
This requires determination of Customs duty on Gold (a manufactured financial asset) and Dore (a manufacturing input)
This also requires determination of GST on gold (financial product) and then GST on jewelry (Luxury good)
Policy:
Purview of GOI, various bodies
Two way trade in gold (to enable India to productively use its large stock of gold), to enhance Make in India and improve the quality standards of products
Commitment to responsible gold standards, international accreditations as opposed to domestic, integrating banking system and easing financial restrictions
World Gold Council 2015 report

12. Smuggling is impacted by the total end rate to the customer1
Smuggling is determined by the overall total rate faced by consumers.
1. Optimal tax setting
Smuggling is impacted by the total end rate to the customer
Current customs duty is 10.3%
GST on jewelry 2
Smuggling can be best tackled by focusing on the end consumer. This is in line with govt current focus via Stricter KYC, raids on black money, AML norms, income tax and PAN 3
As GST increases, the use of jewellery as an inefficient savings vehicle reduces. People use jewellery for luxury consumption, and hence this should attract higher tax
Customs duty on imports 4
Low customs duty enables India to move to gold bullion (as opposed to jewellery) for investment. This supports:
Increasing dematerial use of gold
Make in India for refiners
Reduces inefficient excise and customs regulation
World Gold Council 2015 report

13. 2. Addressing Compliance, Reputation & Integrity Risks
Themes
Key activities
Currently India is not being well served
Lack of Anti money laundering (AML) and compliance rules regulating gold / gold Dore import exposes the nation to huge criminal and reputational risk
Not all gold imported conforms to verifiable international purity standards
“Touch-down” exports of gold jewelry / minted items not only causes harm to nation’s finance but also carries huge reputational risk
Mitigating compliance, reputation and integrity risks
Banks / Nominated Agencies and Refineries importing Gold/Gold Dore must:
Commit to a ‘Responsible Supply Chain’ policy consistent with Annex II of the OECD Due Diligence Guidance for Responsible Supply Chain.
Establish a strong system to comply with high standards of Anti Money Laundering (AML) and Combating financing of terrorism (CFT)
Ensure that all dealings in their supply chain are transacted with organizations that comply with the LBMA Responsible Gold Guidance and are accredited as such by the LBMA/OECD
World Gold Council 2015 report

14. 3. Integrating the Banking system with India’s gold related initiatives
Themes
Key activities
Sourcing gold bullion by Banks
Authorize Banks to source domestically refined gold / silver bullion from domestic refineries having acceptable quality standards
Permit RBI authorized banks operating GMS to deliver GMS gold to domestic accredited refineries for manufacture of Banks’ customized gold minted coins
The higher operating margin from coin sales will enable Banks incentivize GMS gold across all schemes
Banks may negate resultant exposure by buying physical gold from refineries back-to-back with coin sales
Enabling Banks push the Gold Monetization Scheme (GMS)
Enable Banks buy-back minted gold coins
Permit banks to “buy back” their minted coins, in collaboration with domestic accredited refineries; this will also increase the pool of gold being monetized
World Gold Council 2015 report

15. Treat Dore remittances on par with remittance norms for raw material
4. Support Make in India by clarifying the distinction between Gold Bullion
(a finished product) and Gold Dore (a raw material)
Themes
Key activities
Import of gold Dore is governed by the EXIM policy notified by DGFT and RBI does not regulate it
RBI Master Direction No. 17/ dated 1st January 2016, updated as on March 31, 2016 (RBI/FED/ /12) deals with import of goods and services into India.
In terms of above Master Circular, Banks may permit settlement of import dues delayed due to financial difficulties, etc.
Para C.11.2 of the Master Direction addresses import of gold jewellery and limits the trade credit for import of gold in any form, including jewellery made of gold/precious metals…. to not exceed ninety days from date of shipment.
Gold Dore is an industrial raw material, which has to be processed and refined into gold, hence a remittance treatment for raw material must also apply for gold Dore; the ability of gold refineries to settle the dues with the overseas supplier is inextricably linked with their ability to sell the refined output in the market
Treat Dore remittances on par with remittance norms for raw material
World Gold Council 2015 report

16. Permitting export of Gold/Silver Mitigating unwanted transactions
5. Enable export of global best in class Make in India product
(London Good Delivery bars) and support balance of payments
Themes
Key activities
Permitting export of Gold/Silver
Permit export of London Good Delivery Gold bars produced by domestic LBMA Good Delivery refiners to Bullion banks overseas
This will bring foreign exchange into India and mitigate the CAD
Mitigating unwanted transactions
To avoid any abuse and assure a healthy two-way trade in gold, the duty refund may be given in the form of a duty credit, to be used only for any subsequent import of gold Dore and for no other purpose
Suggested process
Export of London Good Delivery gold bars should be at London AM Fix ruling on the date of export, with a duty refund equivalent to the import duty ruling on the date of each export.
World Gold Council 2015 report

17. 6. Applying global norm for settling gold/silver content in gold Dore
Themes
Key activities
Current constraints faced by domestic refineries
Transactions with mining companies are in terms of ounces of the fine metal content in the Dore
Letters of credit can only be established in USD, i.e. a financial currency
An intermediary needs to interface between a metal ounce settlement with the mining company and a USD settlement via a letter of credit established by Indian refinery, needlessly increasing transaction costs
Maintaining unallocated Loco London metal accounts
Globally Banks transact precious metal (gold/silver) content through Unallocated Loco London Precious Metal Account they maintain with international bullion banks
Permit domestic accredited refineries to maintain Gold & Silver Unallocated Precious Metal Accounts with an overseas bullion bank for their precious metal transactions
Ensuring stringent regulations
Every metal transaction must be backed by a corresponding physical mirror transaction. No speculative transaction to be permitted
Authorized Dealer (Bank) of the refinery submits periodic returns to RBI.

18. Going forward 3.

19. What does this mean for stakeholders
What we should aim for
Themes
What does this mean for stakeholders 1
GST rates from
medium to high
Physical gold discouraged, investment in dematerialized form
Encouraging local circulations, greater role for financial institutions
Low duty on dore 2
Increased share of dore in imports, promoting make in India
Greater role for refiners
Increased emphasis on responsible gold 3
Enhanced reputation and reduction in unofficial transations
Greater role for good delivery players on the value chain
Increased 2 way trade 4
Enabling exports and creating a productive use of Indias gold stock
Greater role for financial institutions
Black money tackled via
stringent KYC. Digital gold products such as GMS and GAP 5
Transparency across the value chain
Quality becomes the differentiator

20. What would this mean for the economy
Reduced demand for imports
Increased refining activity within the country as domestic Gold is brought into circulation
Gradual decrease in demand for physical gold/jewellery and an increase in investment demand
Opportunity to reshape the Gold Industry and introduce products that will appeal to the younger population

21. THANK YOU