How to Reduce Current Account Deficit of India?

The current account deficit in India is alarming as everyone knows. Overnight you cannot increase exports with recessionary trends in the International arena. Again, overnight you cannot bring in investments and the next quarter who knows the CAD may again rise up further. This shows the lack of confidence in Indian rupee and the equity market in general and may take up some more time to reach their previous position. Till then the CAD is sure to rise steadily. So some solution must be found out. Simply raising the taxes wouldn’t do any good as there are enough coastline areas and airports where gold attains a mobility of its own to walk in and around with pleasure. This is particularly so where there are corrupt security personnel and bureaucratic connivance. Oil imports cannot be done away with as even a layman now knows. What is most important here is to know where the gold is actually flowing to. It may be kept in lockers of the banks or vaults of some smuggling cartels or in the hands of gold jewelers or secret vaults held by private groups.

Institutionalization of Gold

Gold and for that matter all precious metals that are rare must be institutionalized so that they are brought into circulation no matter where they are. This can be done by making it mandatory as per an act of legislation that all gold and other precious metals in the country are institutionalized automatically with a bare minimum being allowed as gold in hand. This would mean that all gold in the possession of the individuals and organizations are disclosed and this is especially true for gold and other precious metals in the bank lockers. When speaking of gold here it is also implied that other precious metals like diamonds, sapphire, emeralds, rubies and others are also included herewith.

Gold when disclosed or are compulsorily disclosed would have to be pledged to the bank automatically where the bank gives a receipt for a definite period of ten or more years. This loan is then deposited in the bank account in the name of the person whose gold is pledged with the bank. The interest charged for the amount of loan in such specific case should be the same as the interest derived from the deposit for the same 10 years or 20 years as the case may be. The idea is to create more cash for the bank although they may have to square their interest on loan with interest on deposits to keep genuine gold holders happy. The loan on gold should cover only 60 to 70 % of the face value of the material in order to avoid the risk of gold prices going down.

It is quite apparent with the bank becoming more modernized the system of banking would undoubtedly demand less of money and gold in hand and the same should be in the form of e-banking. This would again mean that any gold coming into the country if found or seized is automatically receipted and the same is deposited with the bank as security for the mandatory loan that is again kept in the form of deposits with the bank itself. This again means that gold found in possession of individuals beyond the allowed minimum limits (gold in hand) would be kept with the bank and receipted. If the source of gold is uncertain or illegal then the gold is still deposited with a receipt given and the same is deposited with the bank under the code “Unusual Account No 1, Unusual Account No 2, Unusual Account No 3 and so on. The idea is that whatever form of gold is there in open market should be brought into monetized form for the banking system to grow and flourish. This account of the ‘Unusual nature’ should be kept for a period of 20 years till such time that a court verdict proves it that it rightly belongs to the person or on the contrary not. If it is not then the gold is the property of the Government of India.

These rings true not just for India with its peculiar liking of gold, but in future all other countries would have to follow this practice as the institutionalization of precious metals is paramount in aiming for huge investment opportunities. In future where the bank would require less of cash deals gold and similar precious metals too would necessitate the process through proper institutionalization in the world banking system.

BASEL 3 Requirements

The banks do not suffer any liability by squaring off interest on loan and that of the deposit of gold money in deposits in the name of the customer. It is more or less like the locker system with a difference that the gold is voluntarily disclosed and kept with the bank as a secured place. The banks in turn give loan as a mandatory part of the process and then the same is deposited in the name of the customer with the bank itself. What is the benefit for the bank? The bank creates huge cash for giving loan for industries, infrastructure development and so on. The huge cash meets a greater part of the BASEL 3 obligations of the banks on the whole.

Suppose a depositor wishes to withdraw his deposit of gold then this may easily be handed over to him or her without further access to the locker system.

What happens when the gold is withdrawn?

The individuals or firms drawing the gold by cancelling the deposits should be allowed to do so without any problems. This again implies that the individuals cannot keep the same in any bank locker and the same has to be sold off or utilized within a specified period failing which it is mandatory by law that it would have to be surrendered to the Government as ‘excess gold held in hand’. It is further implied that the gold is akin to that of cash and that the economic system runs with two together and that gold as such is no independent bizarre offshoot of the economic system.

So gold like cash can be withdrawn from the regularized mandatory deposit from the bank, but the same has to be utilized within a fixed limit (as the Government many pass as law) for getting the daughter married off, paying off some bad debts or pledging it elsewhere where the rates of interest is higher.

If an individual fails to provide a previous bank closure receipt date then the gold is seen to be illegal holdings of gold in hand. If the previous bank closure receipt and the time of gold found in possession are beyond the stipulated limit then the gold is seized by the government and a penalty is imposed. This gold is then again routed in the above fashion and that is deposited with the bank as per the law in force and then loan amount given which is again deposited as a Fixed Deposit in the name of the individual.

Here, it is to be noted that the gold imports and cravings will grow in the future as the standard of living of the population of the country goes up.

Gold with Jewelers and institutions

Institutions and jewelers who carry out gold transaction or transaction that relates to physical or non physical stock of gold should be treated at par with the other banks. All gold merchants behave with this rare material in a way quite similar to the cash transactions and provide a store of value for the customers for their future or present use. As the domestic gold transactions are huge and so also the imports it is implied that they have a significant effect on the value of currency in the country. Thus, the gold merchants must as security keep a portion of their gold with the Reserve Bank of India or the Central Bank of other countries so that it acts similar to the CRR (Cash Reserve Ratio ) which the banks have to. For the purpose of gold this can be called GRR (Gold Reserve Ratio). This is again implied that the gold is not an independent circulating messy rare material that creates store of value for some individuals and not for the whole country. The RBI can go for open market purchase and sale of gold to banks and jewelers to control prices and check imports just as if it were a currency.

How does this bring down the CAD?

The CAD would get reduced through this process as the customers who deposit the gold compulsorily would have to make proper disclosure of gold in possession. There will be slow steady scrapping of the opaque locker system. In the future all banks would have to give only transparent lockers where documents of value are kept and seen by the officials and not gold or other precious materials. When gold is dependent on the very banking system it would automatically mean less value in black markets. Again, the free movement of gold will stop.

But this is only part of the story. What about the fuel imports? This has to be done in a very steady orchestrated manner by garnering out and out focus on research of renewable source of energy (this is only in the hands of the Government). Coal as other economists have been voicing about time and again ought to be de-nationalized. Harnessing of solar energy, renewable source of energy ought to be carried out on a war footing. Not in least is the implementation of ethanol mix to run automobiles. There is a massive dearth of research in India at least in these areas.

Further, all liquidity in the bank through the above process wouldn’t be sufficient as the booming credit swallowed through burgeoning investments. This again means that there will be huge money available for the banks to fund large viable Power Projects and Infrastructure projects. A lot of money given as credits by bank to industries has been lost in real estate gambling and the same has been locked up. The bank NPA’s, no doubt, has risen significantly. What is needed here is the attachment of land holding of these industries which the banks then sell it off the same on auction basis at cut down prices so as to recover whatever amount possible. There is urgent need to address this issue without any delay. The Government must be an active participant in facilitating the sale.

Concerted action on all fronts like these can only lead to the checking the CAD.