Gold monetization in India as a transformative policy: a mixed method analysis

Abstract

India is the second largest consumer of gold in the world and gold is a major contributor to the current account deficit. Much of the gold goes out of circulation and is not available to support economic activity. To encourage consumers to bring the gold back into circulation, the government of India instituted the Gold Monetization Policy in 2015. This research views the Gold Monetization Policy in India through the lens of consumer associations with gold, as well as the banker and refiner perspectives on implementation challenges. The success of this policy is important for the country to better manage its current account balance, in a milieu where gold consumption holds sociocultural importance. The research uses an empirical approach to analyse how various stakeholders have approached the policy, and provides suggestions to increase uptake of the policy. It employs a mixed method approach to understand the motivations and barriers faced by various stakeholders in the gold ecosystem. First, a nationwide survey-based study of 1171 households, across 10 states that constitute approximately three-quarters of annual national gold consumption, was conducted to understand the consumer associations with and attributions related to gold. This shows that family functions and festivals to be triggers for gold purchase, indicating ingrained the habit and planned accumulation. There is also high liquidity and safety association of gold (which is also not considered as having any substitute) along with a clear reluctance to sell gold received as a gift. Rural consumers are more reluctant to part with gold as compared to urban but are also ready to pledge gold as collateral suggesting requirement related liquidity use of gold. Second, an interview based study was conducted with senior management of 6 banks, 5 refiners and one industry consultant to understand the challenges and implications of the policy for members of the gold ecosystem. Discussions with these stakeholders clarified that banks would promote products based on this policy if they had more control on the process and if there was clear separation of risks or effective mitigation of risks relating to the operationalization of the policy. Finally, an econometric analysis of gold consumption and its potential determinants was conducted using household data from all 640 districts of the National Sample Survey for 2011-12. The analysis shows that propensity to consume gold is positively correlated with proportion of females in the household and with number of daughters in the household. Also, ceteris paribus, rural households have a higher propensity to consume gold, and Hindu households have a higher propensity to consume gold. Clearly, increasing the effectiveness of the Gold Monetization Policy depends on a deeper understanding of consumers’ interactions with and sentiments towards gold. The effectiveness of the policy also depends on recognizing the challenges faced and incentives required by banks, refiners and other stakeholders in implementing this policy. This research is an attempt at developing such an understanding.