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Market Commentary
10 Sep 2018

A look at India’s gold policies

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Phases Year
The Restriction Phase 1947 - 1962
FERA or Foreign Exchange Regulation Act 1947
The Prohibition Phase 1963 - 1989
The Liberalization Phase 1990 - 2011
The Intervention Phase 2012 - 2013
The Transparency Phase 2014 - 2018

India’s gold related policies and rules have evolved over the years. Today, there’s a shift towards a more streamlined and transparent approach. In February 2018, the Finance Minister in his Union Budget speech said that the Centre will formulate a comprehensive gold policy to develop it as an asset class. This means that just like shares, bonds, property and commodities, gold investments too will be categorized under the single umbrella of an asset.

While recent developments such as the launch of the Indian Gold Coin or the proposed hallmarking regulations will help set a trusted standard for buying and selling of gold in India, let’s take a look at how these policies have changed since Independence.

The Restriction Phase (1947 - 1962)

During this period, policies were aimed at regulating the supply of gold and the domestic gold price, as well as reducing smuggling.

The FERA or Foreign Exchange Regulation Act (1947) helped regulate payments and dealings in foreign exchange, and the import and export of currency and bullion

In 1956, India moved from the gold-backed ‘proportional reserve system’ to a ‘minimum reserve system’ for issuing currency. This meant the RBI was required to maintain gold and foreign exchange reserves of Rs 200 crore, of which at least Rs 115 crore had to be in gold

In 1962, international border disputes significantly drained India’s foreign reserves. In a bid to encourage public funding, the first gold bond scheme was introduced.

The Prohibition Phase (1963 - 1989)

In 1962, the government imposed a few restrictions on the production and transaction of gold, and this led to the Gold Control Act (1968). Excessive gold imports lead to drastic devaluation of the Indian rupee. The Act was introduced to curb this issue and limit personal possession of gold.

Restrictions under the Gold Control Act:

  • Manufacturing of gold jewellery above 14 karat purity was prohibited
  • A limit was put in place for individual holding of gold jewellery

Schemes were launched to reduce gold smuggling and control budget shortage in the country. One such scheme was Voluntary Disclosure of Income and Wealth (Amendment) Ordinance (1975), wherein people were encouraged to disclose their undeclared wealth.

Other initiatives such as conducting gold auctions (1978) and issuing gold bonds were also carried out with the same objective.

The Liberalization Phase (1990 - 2011)

During this phase, the government began to deregulate the gold industry.

In 1990, the government revoked the Gold Control Act. It allowed free import of gold, which in turn generated income from import taxes.

The Non-Resident Indian scheme (1992) and Special Import License scheme (1994) were introduced to allow NRIs to carry gold into India.

By 1997, several banks were authorized to import gold into the country.

In 1999, the government mobilized idle gold through the Gold Deposit Scheme (GDS) and provided an opportunity for gold holders to earn interest on the income.

From 2002 onward, accessing gold became even more convenient. Banks were now permitted to sell gold coins, and by 2008, you could even walk up to the local post office to buy gold

The reach and convenience of owning gold reached its zenith in 2007 with the launch of Gold Exchange Traded Funds (ETFs) in India. The digitization of gold offered flexibility of investment, assurance of quality, and stress-free storage.

Related:The Beginners Guide to Investing in Gold ETFs

The global financial crisis of 2008 renewed consumers’ interest in gold. As demand peaked, gold prices tripled.

The end of the Liberalisation Phase was marked by a huge rise in the total gold demand in the country, which touched 1001.7 tonnes in 2010.

The Intervention Phase (2012 - 2013)

Global uncertainties and domestic governance issues affected India’s exports and investment flows. To reduce the demand for gold, the government introduced further policy interventions.

Between 2012 and 2013, multiple hikes pushed the import duty on gold from 2% to 10%.

A ban was imposed on import of gold coins and sales through banks and post offices.

The introduction of the 80:20 rule enforced an export obligation of 20% on importers of gold. Under this scheme, at least 20% of gold imports had to be exported before bringing in new consignments. Import of the next lot was allowed only upon fulfilment of the previous export mandate

The Transparency Phase (2014 - 2018)

During this period, the government has been promoting transparency in all economic aspects of the country.

In 2014, the 80:20 rule was abolished, and the ban on import of gold coins was lifted.

In 2015, the gold deposit scheme of 1999 was relaunched as the Gold Monetization Scheme. In the same year, Sovereign Gold Bonds were introduced, which offered investors interest on paper bonds.

India’s first ever national gold coin – the Indian Gold Coin(IGC) – was launched by the Prime Minister in 2015.

Related:The Indian Gold Coin: A symbol of national pride

By 2016, the government mandated disclosure of PAN for all purchases above Rs 2 lakh. An excise duty of 1% was levied on jewellers with a turnover of over Rs 12 crore. And the 1% excise duty on branded gold coins with purity of 99.5% was abolished.

In 2018 Union Budget, the Government announced that they will formulate a comprehensive Gold Policy to develop gold as an asset class. The Government will also establish a system of consumer friendly and trade efficient system of regulated gold exchanges in the country. Gold Monetization Scheme will be revamped to enable people to open a hassle-free Gold Deposit Account.

These developments show that the government is working towards shifting to gold policies that are beneficial for the gold buyers in India.

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