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    Pushing households to part with gold won’t bring back their lost jobs and income streams

    Synopsis

    While employment in informal occupations has normalized, the nearly 19 million salaried jobs lost to coronavirus disruption are proving harder to bring back, according to the CMIE.

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    By Andy Mukherjee

    Even if it proves to be a blip, this week’s volatility in gold may have its uses. For one thing, Tuesday’s steepest single-day price decline in seven years should make bankers in India wary of storing up future trouble by writing risky subprime loans against the country’s most-loved commodity.
    Gold has a strong emotive appeal to Indians, who own one-eighth of the metal ever mined. Of late, though, the glitter was beginning to blind the authorities, too. India’s central bank recently raised the loan-to-value limit for advances against gold jewelry to 90% from 75%.

    Now that the international price has fallen by 5.7% in one day, and jumped by 1.3% the next, banks will be uneasy with such low margins of safety. Risk aversion will deter them from giving out loans that might not be repaid. However, lenders may still may push borrowers to take up new gold-backed loans to repay delinquent unsecured credit after the central bank’s Covid-19 moratorium on repayment ends this month. If the money doesn’t return, they can at least sit on the commodity.

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    During the 2008 crisis, American homeowners walked away from underwater mortgages by posting the house keys back to the banks. India’s version of “jingle mail” may also see borrowers put self interest above their cultural affinity for gold, especially if the value of the collateral drops durably.

    Blame it on the pandemic. While employment in informal occupations has normalized, the nearly 19 million salaried jobs lost to coronavirus disruption are proving harder to bring back, according to the Center for Monitoring the Indian Economy. Meanwhile, unsecured consumer credit has dried up, forcing the middle class to monetize its rainy-day hoard.

    Families weren’t swayed by Prime Minister Narendra Modi’s previous exhortations to part with their idle 25,000 tons — only 20 tons have been deposited with banks in a five-year-old state program to wean Indians off gold. It’s because they didn’t fall for the chance to earn interest that they had some capacity for self insurance when the country went into a sudden lockdown in March with hardly any fiscal support from the government. If households now lose their gold by borrowing more than they can afford to repay, how will they navigate the next crisis?

    rally2Bloomberg

    The recent rally that took prices above $2,000 an ounce has prompted other proposals for using gold. One suggestion is for the Indian central bank to transfer its 618 tons of the precious metal at cost to the government and repurchase it at 90% of market value, giving New Delhi the equivalent of $31 billion in freshly minted rupees to repair the economy.

    But raiding the Reserve Bank of India’s war chest or asking people to deposit their unaccounted-for gold with the government for a few years — a tax amnesty plan Bloomberg News reported last month — are unnecessary distractions.

    Monetizing gold would be a worthwhile idea if India were facing balance-of-payment difficulties and needed dollars. That isn’t the case: the RBI’s foreign-exchange reserves have soared past $500 billion. Nor is domestic liquidity in short supply. It’s just that even before the pandemic, India was trapped in a multiyear investment funk, which has drained the financial system of its risk-absorbing capital. Tax collections were already faltering, and now they’re cratering. The post-lockdown recovery is giving all indications of being a long slog. So while consumers are looking at gold for survival, the government is viewing it as a tool for revival.

    But the central bank doesn’t need accounting gymnastics like parting with its gold and buying it back to support deficit financing. Indonesia’s playbook of openly monetizing budget shortfalls offers a saner alternative, provided India can convince markets that temporary print-and-spend would lift future growth (and tax collections) by plugging a part of the capital crunch.

    Using the central bank’s gold to raise resources is no substitute for bolstering the sovereign’s credibility with investors. Pushing households to do the same won’t bring back their salaried jobs and lost income streams. Now that the yellow metal market has blinked, India will hopefully be able to see its options more clearly.
    (Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

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    20 Comments on this Story

    Anindya Gupta45 days ago
    Never trust writers who tell you any different. Gold has and always been a refuge . Investors just need to be prudent to buy it in dips. The funda of printing money is always hyper inflationary and no government has the clue on what to do next.
    Acchche Din47 days ago
    The BJP and associated NDA netas must deposit their illgotten gold publicly with the banks, instead of beating up public using their goondas
    Jagdip Vaishnav47 days ago
    Investment in Gold has gone up mainly because Banks have significantly reduced interest rates on Deposits, Raise service charges. Banks to cope up with Bad loan,NPA provision ,reduces interest rate on deposits.Other side Central Govt go on instructing Banks to disburse loan without security, disburse loan to certain industries
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