10: Gold policies
India has a long-standing affinity with gold, but its gold-policy
measures have often been muddled. Historically, they have
distorted the market without achieving the policies’ aims.
Some recent developments suggest the policy approach is
improving: the Indian Gold Coin and proposed hallmarking
regulations will develop a trusted standard of gold that can be
traded more easily. This may support the government’s gold
monetisation scheme.
A brief history of gold policies
India’s track record on gold-related policies is both
long and varied
The government’s interest in the gold market dates back
to independence in 1947. To understand better the current
gold policy environment one needs to understand India’s
policy history which, broadly speaking can be broken down
into four phases.135
1. Restriction (Ban on private ownership of gold)
Between 1947–1962 policies were geared towards
controlling the gold market. The stated objectives behind
this restrictive approach were to wean people off gold,
to regulate supply, reduce smuggling, and reduce the
domestic price of gold.
2. Prohibition (Era of Gold Control Act)
This restrictive approach was enhanced between 1963
and 1989. The Gold Control Rules were promulgated in
1963 and the final provisions were enacted under the
Gold (Control) Act 1968, whereby several additional
restraints were placed on gold businesses, including:
• Manufacturing gold jewellery above 14-carat purity
was prohibited
• Limits were placed on individual holdings of
gold jewellery
• Individuals and families could only hold up to two and
four kg of gold, respectively, and only in the form of
jewellery, which had to be declared to the authorities
At the same time the government tried to mobilise gold by
issuing gold bonds, introducing gold auction schemes and
through the Voluntary Disclosure of Income and Wealth
(Amendment) Ordinance (1975),136 which encouraged
Indian households to disclose hitherto undeclared wealth,
including gold. These efforts were designed to control the
budget deficit and reduce gold smuggling.
3. L
iberalisation (Government policy aimed at
deregulation)
Between 1990 and 2011 India started to liberalise
(see Chapter 1) and a different approach was adopted,
as the government introduced measures to deregulate the
gold industry:
• The Gold (Control) Act was repealed on 6 June 1990.
Under this policy regime gold smuggling had flourished.
Now, the liberalisation of gold imports took priority137
• The Non-Resident Indian scheme was introduced
in 1992, and in 1994 a Special Import Licence (SIL)
scheme was launched to facilitate entry of gold
into India
• In 1997, under the Open General Licence (OGL)
scheme, seven banks were initially authorised as official
importers of gold; this number later increased to 20
• In 1999, the government tried to mobilise gold through
the Gold Deposit Scheme (GDS), launched by the
State Bank of India to allow gold to be deposited at a
specified interest rate.
• Jewellers were obliged to maintain records of all
business transactions.
135For more information, please see Why India Needs a Gold Policy, Federation of Indian Chambers of Commerce and Industry, 2014.
136Voluntary Disclosure of Income and Wealth (Amendment Ordinance 1975- http://incometaxindia.gov.in/Communications/
Circular/910110000000001074.htm
137The Gold (Control) Repeal Act, 1990; http://lawmin.nic.in/legislative/textofcentralacts/1990.pdf
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The end of this phase was marked by rising gold demand,
gold imports and gold prices. In 2007, demand totalled
771.1 tonnes. It peaked at 1001.7 tonnes in 2010, reduced
slightly in subsequent years, but remained between
850–950t. At the same time, the gold price more than
trebled and the current account deficit (CAD) began to
spiral out of control. (For more information on the
macro-economic back-drop, please see Chapter 1)
4. Intervention (Period of high customs duty
and 80:20 policy)
The deterioration of the current account deficit threatened
to affect the country’s credit rating. Global uncertainties
– caused by quantitative easing and the European crisis,
which affected India’s exports and investment flows –
and an unfortunate convergence of adverse domestic
governance issues were the primary triggers.
Review of gold policy since 1947
Restriction (1947–62)
Intervention (2012–2013)
• Foreign Exchange Regulation Act (FERA) introduced
in 1947
• Duty hike to 10% from 2% through repeated increases
between January 2012 and August 2013
• Nationalisation of Kolar gold mine at Mysore took
place in 1956
• Introduction of the “80:20 rule”, an export obligation
of 20% on importers of gold138
• Replacement of the proportional reserve system with
the minimum reserve system for currency issue in 1956
• Ban on import of gold coins and sales through
banks and post offices139
• First Gold Bond Scheme introduced in 1962.
• Reducing the loan that can be given against gold as
collateral from 75% to 60% of the value (LTV ratio).140
Prohibition (1963–1989)
Transparency (2014–end-2016)
• Gold Control Rules (1963)
• Gold (Control) Act (1968)
• Removal of “80:20,” an export obligation of 20% on
importers of gold (November 2014)
• Gold Bonds 1980 (March, 1965)
• Ban lifted on import of gold coins (November 2014)
• National Defence Gold Bonds 1980 (October, 1965)
• Gold Deposit Scheme of 1999 withdrawn and
relaunched in new form as Gold Monetisation Scheme
(November 2015)
• Voluntary Disclosure of Income and Wealth
(Amendment) Ordinance (1975)
• Gold auctions (1978).
Liberalisation (1990–2011)
• Gold Control Act 1968, repealed in June 1990
• Launch of first ever National gold coin – Indian Gold
Coin (November 2015)
• Sovereign Gold Bond Scheme launched
(November 2015)
• NRI Scheme introduced in March 1992
• PAN (Tax Number) made mandatory on jewellery
purchases above Rs200,000 (January 2016)
• Scope of Special Import License (SIL) scheme
expanded to include gold in April 1994
• Introduction of 1% Excise duty on Jewellers above
Rs120mn turnover (April 2016)
• In 1997, seven banks were authorized to import
gold – a number that was later increased to twenty
banks. Gold Deposit Scheme (GDS) launched by
State Bank of India in 1999
• Demonetisation of INR500 and INR1,000 notes
(November 2016)
• Gold Deposit Scheme (GDS) launched by State Bank
of India (1999)
• Banks permitted to sell gold coins in 2002, extended
to India Post in 2008.
• Removed 1% excise duty on branded gold coins with
purity of 99.5% (December 2016)
• New Bureau of Indian Standards (BIS) Act introduced
that makes Hallmarking mandatory, effective
1 January 2017.
138RBI/2013–14/148, A.P. (DIR Series) Circular No.15, 22 July 2013.
139RBI/2013–14/187, A.P. (DIR Series) Circular No. 25, 14 August 2013.
140RBI Notification RBI/2013–14/260, DNBS.CC.PD.No.356 /03.10.01/2013–14, 16 September 2013.
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Resolving these required deepseated structural reforms,
but instead policymakers settled for a short term
“solution” of erecting barriers to curb imports. And gold
was an easy target.
On January 17, 2012, custom duty was raised to 2% and
then again to 4% on March 16, 2012. The following year
the import duty continued to rise, eventually reaching
10%, and the government introduced a new set of
restrictive policy measures aimed at curbing demand.
The measures were imposed to address the sudden
deterioration in the CAD.
5. T
ransparency (Policy drive of Prime Minister Modi’s
government to improve transparency and expand
tax base)
In recent times, the government has been pushing for
transparency in all aspects of economic activity and, in
particular, to expand the tax base from just 1% of the
population to at least 10%. Although disruptive in the
short term, over a longer time frame gold should benefit
from this drive, which supports the initiative to mainstream
gold savings through banking and organised channels.
Does policy intervention work?
Gold demand data indicates that successive attempts
to curb the demand for gold have proved ineffective.
Restrictive import policies had a limited effect on demand.
Instead, they led to increased smuggling. The volume of
gold smuggled into India between 1968 and 1995 varied
from 10 to 200t per year and from 2013 and 2014
– when the 80:20 rule was in effect – smuggling rose
to between 350–400t.
In contrast, during periods of liberalisation in the gold
market demand was met primarily through official
channels. Smuggling was curbed, the price differential
between the domestic and international gold market
narrowed, and the government earned revenue through
import tariffs and domestic taxes.
The evidence – including the econometric analysis outlined
in Chapter 1 – suggests that policy intervention, at best,
has a marginal, short-term effect. It would seem more
appropriate to question whether an economically and
traditionally significant asset like gold should continue
to be treated in an ad-hoc manner by successive
governments. Perhaps the time is right to deliver a
comprehensive gold policy for India, one which would
accept India’s affinity with gold and put that affinity to
work for the good of consumers, the good of the industry
and the good of the economy.
Recent developments
Gold Monetisation Scheme
In 2015 the Indian Government launched the
Gold Monetisation Scheme (GMS). The objectives of
this scheme are:
• To mobilise the gold held by households and institutions
in the country
• To provide a fillip to the gems and jewellery sector in the
country by making gold available as a raw material on
loan from the banks
• To boost recycling and reduce India’s reliance on imports
to meet domestic demand.
The gold monetisation scheme deposits fall into two
categories: a Short Term Bank Deposit (STBD)141 and a
Medium and Long Term Government Deposit (MLTGD).142
In the GMS customers can deposit gold in any form – be
that jewellery, ornaments or bars and coins – to be assayed
and then credited to the appropriate account.
The principal and interest on an STBD are denominated
in gold. In the case of MLTGD, the redemption of the
principal at maturity shall, depending on the depositor’s
preference, be either in Indian Rupees equivalent to the
value of gold at the time of redemption, or in gold. Where
the redemption of the deposit is in gold, an administrative
charge of 0.2% of the notional redemption amount in
terms of Indian Rupees is applied. But the depositor does
not have this flexibility when it comes to the interest; the
interest accrued on MLTGD is calculated with reference to
the value of gold in terms of Indian Rupees at the time of
the deposit and is paid in cash.
141STBD – Short Term Bank Deposit – The deposit of gold made under the GMS with a designated bank for a short term period of 1–3 years.
142Medium and Long Term Government Deposit(MLTGD) – The deposit of gold made under the GMS with a designated bank in the account
of the Central Government for a medium term of 5–7 years or a long term period of 12–15 years or for such period as may be decided from
time to time by the Central Government.
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The scheme has had a slow start. According to the
Finance Ministry, 5.7t143 of gold has been collected under
the Gold Monetisation Scheme. Most of these deposits
have been from temples and trusts. Nevertheless, it is
worth considering what success would look like for this
scheme. It is well documented that the previous Gold
Deposit Scheme launched in 1999 only managed to
mobilise around 15t over its lifetime. The latest scheme is
still very much in its infancy: incentives and infrastructure
need to be developed. In our view, if the scheme has
accumulated 25–30t in the next three years, it could be
considered a success.
GMS-linked Gold Metal Loan (GML) scheme
Introduced in late 2015, the objective of this scheme
is to use the gold mobilised through the monetisation
scheme to reduce imports of gold to some extent. The
Reserve Bank of India specified that the gold mobilised
under STBD may be provided to jewellers as GML. The
designated 144 banks can also purchase the gold auctioned
under MLTGD and extend GMLs to jewellers.
Under this scheme, jewellers will receive physical delivery
of the gold either from the refiners or from the designated
bank, depending on where the refined gold is stored.
Designated banks other than the nominated banks145
are eligible to import gold only for the redemption of
the gold deposits mobilised under the STBD.
The designated banks are free to determine the interest
rate to be charged on GMS-linked GML.
Hallmarking and Assaying
India’s gold industry has long been plagued by
undercarating. But this might be about to change. In
March 2016, the government of India received the assent
of the President on the new Bureau of Indian Standards
(BIS) Act 2016 (New BIS Act), which will replace the old
BIS Act of 1986.
The New BIS Act will be effective from 1 January 2017
in the official gazette of India.
The Act has significant implications for India’s gold
industry as it has provided specific empowerment
to the Central Government in the following areas of
standardisation for gold:
• The BIS will become the national standards body of
India, and the government has been empowered to
make hallmarking of precious metals compulsory.
This could transform the industry. For example, the
government could make it compulsory that such articles
are sold only through certified outlets
• It also comes with legal powers. The use of a hallmark
by non-accredited jewellery centres will be an offence.
Retailers that violate the hallmarking rules will be liable
for a fine of up to 10 times the value of the product, or
imprisonment for up to two years
• If hallmarking of precious metals becomes mandatory
and any hallmarked jewellery is found to be of lower
caratage, consumers will be able to complain via the BIS
website and ask the seller for a replacement.
Jewellery shopping.
143 Correct as of 14 November.
144According to RBI Designated Banks are All Scheduled Commercial Banks (excluding Regional Rural banks) that decide to
implement the Gold Monetisation Scheme.
145Nominated Bank: A scheduled Commercial Bank authorised by the RBI to import gold under the extant Foreign Trade Policy.
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Sovereign Gold Bond scheme
Sovereign Gold Bonds (SGBs) are government securities
denominated in grams of gold. They are substitutes for
holding physical gold; they are not backed by physical
gold. Investors have to pay the issue price in cash and the
bonds will be redeemed in cash on maturity. The Bond is
issued by the Reserve Bank on behalf of the Government
of India.
The Bonds are denominated in multiples of gram(s) of gold
with a basic unit of one gram. The tenor of the Bond is a
period of eight years with an exit option from the fifth year,
exercisable on the interest payment dates. The minimum
permissible investment is two units (i.e. two grams of
gold). The maximum amount that can be subscribed is
500 grams per person per fiscal year (April–March).
The finance ministry has recently permitted listing and
trading of the first tranche of gold bonds. Trading in these
bonds began on 9 June 2016 on both the Bombay Stock
Exchange and the National Stock Exchange.
New trade and policy forums
Faced with the new gold policy framework, regulatory
challenges, and the increase in smuggling in 2016, India’s
bullion sector has continued to make moves to formalise
its business. Most recently, the ‘Bullion Federation of
India’, an industry body composed of 50 leading bullion
dealers across 17 states, was created amid a groundswell
of intention to conduct business in a transparent way,
avoiding unaccounted money and fully complying with tax
requirements and regulation.
And encouragingly, the government has established an
all-encompassing working group to look at the regulatory
environment for gold. We are hopeful that such a
centralised review of gold related regulation will yield
positive results for the gold. While this is a welcome
development for the industry, more can be done.
While it may appeal to institutional investors, this is
unlikely to appeal to retail investors. For them, physical
gold is more than just a financial return. Gold is entwined
with religion and emotion. In our view, the Soverign Gold
Bond Scheme is unlikely to affect physical gold demand.
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Focus: India’s latest effort to crack down on black money
will have a big impact on gold demand
India has a long and troubled history with black money – or
unaccounted wealth - and the authorities latest scheme to
combat it will have a big impact on both India’s economy
and its gold demand. On the 8 November 2016, Prime
Minister Narendra Modi announced that the government
of India was withdrawing the legal tender status of Rs500
and Rs1,000 banknotes. About 86% of the total value of
currency in circulation was suddenly removed from the
financial system. While the intention of the authorities
– to bring black money into the official economy – is
praiseworthy, the measure is likely to squeeze economic
growth in the short term, especially given the importance
of cash in the grey economy. But looking further ahead, a
more efficient, transparent economy will support growth
and that, in turn, will support gold demand.
weigh on discretionary consumption in the short-term, and
affect businesses’ investment prospects. Some sectors
will be harder hit than others. Real estate transactions
often involve an element of cash, so property prices are
likely to falter, which may have a damaging wealth effect,
further weighing on sentiment and domestic demand.
‘Demonetisation’ is not new to India but the effects
of the latest move are far-reaching
A total of Rs15.44 trillion (tn) – or 86% of the currency in
circulation – was withdrawn from the economy following
the announcement on 8 November. While Rs1000 notes
have been scrapped entirely, new Rs500 notes and
Rs2000 notes have been introduced. By mid-December,
Rs12.44tn scrapped currency had come back into the
financial system – an impressive amount, but it still
represents a liquidity squeeze.146
Although gold demand faces some short-term
headwinds, longer-term prospects are encouraging
The cash crunch is taking its toll on gold demand in the
short term. Rumours about caps on gold holdings and
gold buying added fuel to the fire. And as tax authorities
investigated some jewellers who had, immediately after
demonetisation, created opportunities to convert old
currency for fake or back-dated sales, the resultant panic
ensured that even genuine gold buyers were reluctant to
buy wedding jewellery. The caps on withdrawals from
banks and lack of cash in ATMs meant that whatever
cash was available was largely spent on essential items,
in both rural and urban India. Small jewellery businesses,
particularly in the rural centres, will feel the pinch until
cash becomes more freely available.
This has happened before. In 1946 and 1978 the
respective governments of the day executed similar
measures. But the impact was less severe as high
denomination notes did not account for as large a share of
total currency and were not as widely held by the general
public as in 2016. This time around all sections of Indian
society have felt the impact, including the very poor. But
it was part of a broader strategic plan, which began with
the Jan Dhan ‘financial inclusion’ programme (intended to
provide access to a bank account for every household).
This will have eased the inertia and fear around banking
transactions for many, smoothing the path towards greater
acceptance of non-cash transactions.
The latest move will, undoubtedly, have a significant
impact on the economy in the short-term. The grey
economy – which is wholly reliant on cash – accounts
for nearly 83% of non-agricultural employment147 and in
2008 accounted for around 46%148 of Gross Value Added
excluding agriculture. The depth of the contraction will
depend on how much of the Rs15.44tn is replaced, and
how quickly it happens. The liquidity squeeze from will
In the long-run, however, it should have a positive effect
on economic growth. Bringing more of this economic
growth into the formal sector will reduce corruption which
hinders economic growth. The boost to bank deposits
arising from the combination of the Jan Dhan programme
and the demonetisation announcement will improve
banks’ ability to lend to productive businesses, further
boosting economic growth.
Together with the introduction of Goods and Services
Tax, mandatory hallmarking and a massive push by
organised jewellers to promote non-cash payments,
business practices across the gold trade will become more
transparent. This will hit the grey market and deter those
seeking anonymity in order to avoid taxes. Consumers
meanwhile will see the benefits of transparency in prices
and purity. The organised trade will prosper as gold enters
the mainstream financial system.
This latest demonetisation exercise should also expand
the tax base and the positive impact on public finances
could generate a more benign and gold-supportive
policy approach. Transparency across the value chain is
necessary for gold to be mainstream. This is a historic
opportunity for the industry to redefine itself and emerge
stronger, domestically and globally.
146 https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38886
147 http://laborsta.ilo.org/applv8/data/INFORMAL_ECONOMY/2012-06-Statistical%20update%20-%20v2.pdf
148 http://www.ilo.org/wcmsp5/groups/public/---dgreports/---stat/documents/publication/wcms_234413.pdf
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