Up until 1990 Indians were not supposed to hold Indian gold bullion privately due to the Gold Control Act. So most gold investment was in gold jewelery up to then although, of course, there was some limited smuggling of ten tola gold bars. These days, gold bullion is the second most preferred investment vehicle for Indians after bank deposits and for traditional families, probably the first.
After 1990 the increase of Indian gold bullion in the form of small bars, both imported and local, increased significantly to where India now consumes around 800 tonnes of gold a year. This is around 20 percent of the global demand in gold.
In the 1999/2000 budget the Indian government announced a new initiative to tap some of the private gold being held in India, by allowing the commercial banks to take deposits of gold bars, gold coins and gold jewelery against payment of interest. In India, the interest levels are set by each bank individually and all deposits are for three to seven years. As a further inducement, interest and capital gains on gold are exempt from tax.
However the amount of gold collected through this scheme has not been as much as expected falling short of the estimated 100 tonnes hoped for when it was launched. It seems that Indians prefer to keep their gold and pay their debts with money instead.
But now The National Spot Exchange, controlled by Financial Technologies, the Indian market company, is offering contracts for domestic gold bullion, ranging in size from 8 grams up to 1kilogram.
"Though India has a huge household stock of around 20,000 to 25,000 tonnes of gold, there was no single market available where this could be sold." managing director and chief executive of the National Spot Exchange, Anjani Sinha, stated.
He went on. "You don’t know what is the purity, you don’t know what the jeweller is going to pay to you ... and the price realisation is not good because there is no electronic or nationalised market for selling gold." said Mr Sinha. He pointed out that the total commission paid under the new system would be about 50 basis points, or 0.5 per cent.
Sellers now take their gold to approved refineries who then turn it into international standard gold bars of "995" purity.
Whether this will be inducement enough for private families and individuals, traditionally preferring to keep their wealth in Indian Gold Bullion, to relinquish and give up their gold is a moot point. Historically the Indian culture has not found it in its heart to give up gold bullion for cash.