Modi's plan to wean India off gold: trading God's gift for cash

[MUMBAI] The prospect of his gold offering to the Hindu deity Lord Venkateswara being melted down to help India shrink its trade deficit strikes Balbir Singh Uppal as sacrilegious. To some bankers, it's just tone deaf.

"The gold is considered to be god's property, and no one else has a right over it," said Mr Uppal, 60, founder of rice and wheat miller Lakshmi Energy & Foods Ltd.

To give thanks for the birth of his grandson, Mr Uppal donated gold objects in 2007 at the country's most visited temple, the Sri Venkateswara in Andhra Pradesh. An oil lamp, spoons, shell and bathing vessel were among the items he left. They matched the weight of the boy, which was 15 kg, and were worth about 15 million rupees or roughly the equivalent of US$360,000 at the time.

In a nation where the metal is so central to everyday life that seasonal demand tied to weddings, festivals and monsoons can move global prices, Prime Minister Narendra Modi wants to pay people to borrow gold sitting idle in thousands of temples and millions of homes to curb an insatiable demand for imported bullion. While that makes some economic sense, it will be a tough sell in the face of religious and cultural history, according to UBS Group AG.

India, which has few of its own mines, was the world's biggest gold buyer before being overtaken by China in 2013. An expanding economy that lifted wages has led to a surge of imports, compounding a trade deficit that reached a record high in 2013 and sent the rupee to an all-time low.

The government says about 20,000 metric tons of gold reside in temples or hide in drawers - more than twice the official gold holdings of the US which are 8,133.5 tons.

By getting more gold to circulate, Mr Modi hopes to boost domestic supply. For this to work, he must convince people that their gold is just a commodity rather than a religious object or a prized family possession. In the end, everything under Mr Modi's plan gets melted down to ensure the metal's purity and to create uniformity so that the gold can be resold by banks.

As an incentive, the banks pay interest for the right to use the gold, and then at a later date, will replace the gold or pay an equivalent value in cash.

Similar programmes have worked elsewhere.

Turkey, the world's fourth-largest gold buyer, in 2011 allowed banks to hold part of their reserves in gold, which Credit Suisse Group AG says helped financial stability by reducing the cost of funding. The World Gold Council estimates the country's citizens stashed at least 3,500 tons of gold "under the pillow."

For India's nearly 1 billion Hindus, gold holds a special place in the religion. Because the metal has passed through fire as a test of purity, it's considered an auspicious ornament for praising deities and as a gift in traditional rituals such as during the wedding season from October through May.

Only about 20 per cent of the idle gold is in temples, according to the World Gold Council. The rest sits in homes. Many Indians consider jewellery a family heirloom with strong emotional ties.

In rural areas that represent 60 per cent of gold demand, bullion is the only form of investment because most people aren't able to get bank accounts. When the annual monsoons come, gold traders track rainfall that can mean bigger crops and more purchases of the metal by farmers.

Mr Modi's plan "may still not fully address the public's deep-rooted connection with gold," UBS analysts Edel Tully and Joni Teves said in a May 27 report.

In its draft rules unveiled last month, the finance ministry proposed tax waivers to participants and a free hand to banks to set the interest rates on gold deposits. Individuals and institutions can deposit a minimum of 30 grams - the equivalent of a thin necklace - that banks would then loan to jewelers or sell to generate foreign currency for lending.

It's not the first time that the world's most-populous country after China is taking a shot at tapping its citizens' vast bullion holdings. A gold deposit plan run by the State Bank of India since 1999 managed to lure just 15 tons because of a requirement to deposit a minimum 500 grams - equivalent to the weight of about three iPhone 6 Plus handsets - and low interest rates of 0.75 per cent to 1 percent, according to UBS.

The new plan is destined to fail because interest on savings accounts pay 8 per cent to 9 per cent, well above what gold deposits might fetch with their additional costs for processing and storage, according to Manish Jain, chairman of the All India Gems & Jewellery Trade Federation, which represents 300,000 jewelers.

In Kerala, the southern state that produces almost all of the country's pepper and is home to one of its oldest Hindu temples, Chief Minister Oommen Chandy pledged to oppose any attempt to send religious treasures to banks, the Press Trust of India reported in April.

Such objections may not prevent the program's success, said P R Somasundaram, the managing director in India for the London-based World Gold Council. With so much metal outside the temples, it may be appealing for owners to earn money on an asset that isn't providing a return, he said.

"The government is actually leveraging the wish of people to hold gold, but in a manner that also helps the economy," Mr Somasundaram said by phone from Mumbai.

India will initially roll out gold deposits to a few cities with handling and storage facilities, the ministry said. There are 350 sites capable of providing jewelry assay services approved by the Bureau of Indian Standards and 32 refineries.

Even if the plan succeeds, there's little sign that Indians have lost their appetite for gold. After the government eased restrictions on imported gold, accelerating economic growth will help India reclaim the title of the world's top consumer from China this year, the WGC said. Demand will rise to between 900 tons and 1,000 tons, the council estimates.

Mr Modi's monetising program may have the unintended consequence of boosting demand for gold, which will be seen even more as a store of value if holders can generate income on their holdings, Deepali Bhargava, an analyst at Credit Suisse Group AG, said in a May 28 report.

"The jury is still out on this and it depends on the incentives on offer for both the banks and depositors," Nomura Holdings Inc analysts led by Sonal Varma said on May 21.

"Depositors want higher interest rates, while banks want regulatory exemptions. If these are provided, then the scheme may be successful. If not, then it risks being a damp squib, like the one in 1999."

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