Sanjiv Arole examines the reasons why the Indian gold industry could gain a prominent place in the global gold ecosystem.
History, they say, has a strange way of repeating itself. De Beers was one of the most significant and strongest monopolies of the 20th century. Synonymous with the Oppenheimers, this diamond conglomerate not only controlled the source of rough diamonds (at its peak over 90% of all rough diamonds in the world), but also managed the entire diamond pipeline. In the 1960s, De Beers faced its first major challenge when the manufacturers (of cut & polished diamonds), particularly from Israel tried to break free from the cartel. At that time, De Beers propped up, developed and supported India as a cutting and polishing centre for smaller diamonds that were then not cut by anyone. India took upon this opportunity and over the next several decades, cut and polished diamonds of all shapes and sizes. So much so that today, 95% of the world’s cutters are in India, with around 90% of diamonds cut here by volume and more than 75% by value.
A similar story seems ready to be unfolded for the gold bullion industry in India. In spite of being one of the two largest consuming centres of gold (the other being China) in the world, the Indian gold market is inefficient, shallow, immature, complex, opaque, riddled with high tariffs and poor quality of gold in jewellery. Even though India is geographically and strategically placed in the centre of the global gold trade, it is just a price taker and has little or no influence on global gold markets.
The gold market is very complex and ever-evolving. Over 90% of the gold trade is taken up by the three major hubs in the world: The London OTC market that has historically been the centre of the gold trade and comprises around 70% of global notional trading volumes, with 9,600 tonnes valued at $575.4 billion as of end January 2021. It also sets twice the global benchmark for gold, the LBMA gold price. Despite London’s leading role in the physical market, trading activity on the COMEX futures market in New York often acts as a proxy to the spot price, with around 27 million ounces traded daily. The exchange is successful in tapping the Asian market growth in gold. Then, the largest purely physical spot exchange in the world is the Shanghai Gold Exchange. Apart from that there are smaller exchanges in Japan, Singapore, Hong Kong and India. However, the bone of contention is the Dubai Gold & Commodity Exchange (by value $12.68 billion as of January 2021). The LBMA is seized by the fact that over 95% of all illicit gold from DRC (Congo) and other African conflict areas finds its way into the Dubai Exchange.
According to reports, the LBMA published some recommendations for centres like Dubai with three main objectives: the responsible sourcing of recycled gold, eliminating cash transactions and support of small artisanal and small scale mining. Further, LBMA will only permit its Good Delivery List refiners to source material from bullion centres which meet OECD standards. Moreover, an investigative and policy group reports that 95% of the gold mined in east and central Africa reaches Dubai, from where it assimilates into global markets. As a result, armed and other rebellious groups in Africa benefit from the trade. It also provides the largest source of revenue to armed groups in eastern DRC. More pertinently, if the recommendations are ignored, then the LBMA would advise avoiding sourcing gold from centres such as Dubai, leading to a potential boycott. That is the window of opportunity for India and the glimmer of hope to become the trading hub for gold in the world!
At a recent webinar, held under the aegis of IIGC 17, in late November, 2020, LBMA officials indicated that they were keenly following the setting up of an International Bullion Exchange at IFSC in the Gift city at Gandhinagar. It seemed that LBMA was eager to accept the International Bullion Exchange in India into the global mainstream. For, an efficient, mature and deep Indian gold market could only benefit global gold trade.
The World Gold Council (WGC) CEO, David Tait, said in his speech that an efficient, trusted and transparent gold exchange in India could ensure its smooth integration into the global gold ecosystem. The WGC was more than keen to back India as a global hub in the region. He felt that it was time that the India gold market should assert itself in global gold trade even though it was just an importer of gold. That should not deter Indian gold industry from gaining its rightful place in the global gold ecosystem. He stated that maintaining high standards, code of conduct to run the trade and with mandatory hallmarking just two months away India was poised to take a giant stride. He pointed out that a strong and efficient regulatory authority needs to be in place for gold in India. This could be the game changer for Indian gold industry to gain its rightful place under the sun.
Is India ready to take the plunge? What is the status of the International Financial Services Centre (IFSC) Gift city? When will the International Bullion Exchange be functional? That is the crux of the matter!
In the Budget presented in 2015, the then Finance Minister proposed an International Finance Centre (IFC) at BKC in Mumbai. However, that project remained only on paper. Mumbai’s dream project (IFC) appeared to have vanished into thin air when the Finance Minister Nirmala Sitharaman announced the setting up of an International Bullion Exchange at IFSC in the Gift city at Gandhinagar, Gujarat in her Budget speech. Reports indicate that the International Bullion Exchange is likely to be operational by July-August and the Government hopes to attract a sizeable chunk of gold trading to shift from Dubai to India. The bullion exchange is to be set up by the BSE, NSE and the MCX, along with an international partner.
The entities setting up the Exchange need to have a net-worth of $30 million on a continuous basis. Bullion clearing operations will take place at the IFSC. Moreover, importing bullion banks, logistics and vaulting services will be present there. In fact, vaulting services have already commenced in Gift City with Sequel Logistics opening a precious metals vault there. An entire value chain comprising surveillance, depository receipts and consumer education will also be operational. The exchange is expected to push towards uniform gold pricing in the country and help in taking steps towards making gold a mainstream asset class.
Mumbai has been the undisputed financial capital of the country. Therefore, the shifting of the IFSC and the International Bullion Exchange will always be debatable. Probably, the Gift City that was conceptualised in 2007 and is only 18-20% complete even after 10 years could have been the reason. With IL&FS having pulled out in 2020, the project is now wholly Government owned. After the 2015 Union Budget, the IFSC was allocated to the Gift City and thereafter, the Central Government, in particular, has offered various sops to the project.
Apart from Tata Consultancy Services (TCS), Bank of America (BoA) and Bank of Baroda (BoB), not many have opted for the Gift City. In fact, of the promised 10 lakh jobs by 2020, only around 10,000 jobs have fructified. The expected deluge of Fintech & IT companies to Gift City from Mumbai, Bangalore, etc. has simply not taken place. So, it is vitally important for the second phase of the project and for the bullion exchange and IFSC to become a roaring success. The very survival of the Government’s pet project is at stake. The need of the hour now is for all to work towards a common goal.
Dubai is often referred to as the City of Gold, quite literally so. For, Dubai is the conduit between the gold mines in Africa and the main consuming centres of India and China. It is also situated between the vaults in London and the refiners in Europe. However, it was always not the case. India was a thriving bullion market with the then erstwhile Bombay Bullion Association, now India Bullion and Jewellers Association (IBJA) rates being published in London. Mumbai had a thriving futures trading in precious metals (gold, in particular) with turnover more than that on the BSE.
But, the imposition of the obnoxious Gold Control Act in the early 1960s set the Indian gold industry into the stone ages for the next 25-30 years. Overnight, the trade became illegal and holding of gold bullion was banned and then the trade went underground. This is when Dubai came into prominence. For, oil was first exported from Dubai only in 1969. Till then, Dubai was a sleepy port with some exports in pearls. It became the gold hub, supplying gold bullion and jewellery to India often by using illegal means (small dhows). No income tax and no import duty then made Dubai into an international business hub and the great City of Gold today.
But, the genesis of Dubai into its present day status was (still is) in India’s high tariffs (both income, Customs and excise or now GST) on gold. It quite literally made Dubai, the City of Gold. Even today, higher import duty sees gold smuggling from Dubai (even from other destinations now) into India rear its head. After having benefited immensely from India’s flawed policies and largesse for well over 50 years, it is payback time for Dubai now!
However, merely setting up an International Bullion Exchange (IBE) will not act as a magic wand. The Indian gold market should seamlessly integrate into the global gold markets, if it aspires to be the Gold Hub in the region. For, Dubai may not simply turn over. The need of the hour is to synchronise its laws, tariffs, etc. with the global gold ecosystem. One also cannot isolate the domestic gold market from the IBE. There should be proper representations for domestic participants on the IBE. That could, in turn, help in setting uniform gold prices in the country. If India wants to replicate the success of the diamond industry, then it is pertinent to remember that it was only after the domestic sector was exposed to the international markets did diamond exports show an exponential growth. Is India ready for the plunge? As the saying goes, “don’t look a gift horse in the mouth”.