The New Gold Policy

Summary

The New Gold Policy is a Forum of Free Enterprise booklet compiling talks from a symposium held in Bombay on 3 April 1978, prompted by the Union Budget 1978-79 proposal that the Government of India sell gold from its own stocks (and possibly import gold) to the public. Four contributors examine the move from distinct vantage points: B. S. Mahajan (a founder of the All-India Sarafa Association) argues from the jewellery-export and trade angle that the Gold Control Act should be scrapped; D. R. Pendse (Economic Adviser to Tatas) treats it as an economist and welcomes the gold sale as ‘the golden solution’; Prof. Gangadhar Gadgil (an economist) stresses price stability; and S. N. Sonawala (Vice-President of the Bombay Bullion Association) answers common objections from the bullion trade’s perspective. The shared thread is a market-friendly, anti-control reading of India’s gold problem: that the 15-year-old Gold Control regime failed to stop smuggling, harmed goldsmiths, and that selling government gold can curb smuggling, mobilise idle savings, and raise revenue.

Essays

Gold Control Act Should Be Scrapped

By B. S. Mahajan

B. S. Mahajan argues that the Gold Control Rules (enacted January 1963 as an emergency measure under the Defence of India Rules 1962) turned gold from a solution into a problem. The controls, though aimed at the laudable goal of stopping smuggling (then costing Rs. 40-60 crores of foreign exchange a year), were impractical and culturally tone-deaf in a country with deep traditional attachment to gold, breeding fear and hoarding. He notes that smuggling fell only when world economic conditions changed (the U.S. ending gold-price control around 1970), not because of controls. He proposes a Voluntary Disclosure Scheme for primary gold and government sale of gold at international prices to tap hoarded primary gold, recycle it for equitable distribution, and make smuggling uneconomic, concluding the Gold Control Act serves no real economic interest and should be examined for abolition.

• Gold Control Rules were enacted January 1963 as an emergency measure under the Defence of India Rules 1962.
• Controls were impractical given Indians’ traditional, religious and social attachment to gold.
• Smuggling fell due to changed world economic conditions (US ending gold-price control c.1970), not the controls.
• Proposes a Voluntary Disclosure Scheme for primary gold plus government sale at international prices.
• Concludes the Gold Control Act should be scrapped / reviewed by the appointed Committee.

The Golden Solution

By D. R. Pendse

D. R. Pendse, Economic Adviser to Tatas, calls the government gold sale ‘the golden solution’, noting the paradox that gold — long presented as one of India’s chief problems — is now offered as a solution to basic economic problems, and arguing this is true. He stresses that implementation quality will make or mar the scheme: the government must offer gold at a competitive price relative to the smuggler’s and keep the transaction as simple as buying over a counter, avoiding bureaucratic forms. He estimates large potential profits and proposes that the proceeds be credited to a separate fund — a ‘New F.E.R.A.’ which he reinterprets as a ‘Fund for Employment in Rural Area’ — to finance rural job-creation schemes. He urges the government to keep Indian gold prices high to maximise the price gap that funds the scheme and roots out smuggling. His article previously appeared in the Economic Times.

• Frames the government gold sale as ‘the golden solution’ to economic problems.
• Implementation must be business-like: competitive pricing vs smugglers, counter-style simplicity, no bureaucratic forms.
• Proposes a separate fund — punningly a ‘new FERA’, a ‘Fund for Employment in Rural Area’.
• Argues government should keep Indian gold prices high to maximise the profit-funding price gap.
• Article previously appeared in the Economic Times; based on a 3 April 1978 FFE talk.

Price Stability Essential

By Prof. Gangadhar Gadgil

Prof. Gangadhar Gadgil examines the 1978-79 Budget proposal in two parts: an anti-smuggling sale of gold from government stocks (domestic production and confiscated gold, estimated at Rs. 500 crores) for domestic use, and a sale of gold at international prices to exporters of gold jewellery. He notes the long-standing view that Indians’ predilection for gold is a wasteful habit that diverts savings from productive assets and slows growth, while conceding that import bans were never successfully enforced even during the Emergency, with smuggling persisting as a drain on foreign exchange and a source of black money. He argues it is better to satisfy domestic demand through government sale — capturing part of the smugglers’ profits for productive investment — and that, if Indians are to be weaned away from gold, price stability in the country is essential.

• Budget proposal has two parts: domestic anti-smuggling gold sale (~Rs. 500 crores) and gold sale to jewellery exporters at international prices.
• Indians’ gold preference is seen as diverting savings from productive assets and slowing growth.
• Import bans were never successfully enforced, even during the Emergency.
• Government sale can capture smugglers’ profits for productive investment and discourage smuggling.
• Weaning Indians off gold requires price stability in the country.

Some Common Questions and Their Answers

By S. N. Sonawala

S. N. Sonawala, Vice-President of the Bombay Bullion Association, opens a question-and-answer treatment of the gold-sale policy from the bullion trade’s standpoint. In the rendered opening he argues that government sale of gold serves two main objectives — curbing inflation by siphoning surplus money into ‘dead’ investment in gold, and checking smuggling — and rebuts the objection that selling gold would encourage black money, contending instead that it offers black money a harmless outlet. He notes the government’s gold stock comes mainly from confiscated contraband or domestic mining and that gold held idle by the Reserve Bank serves no useful function. (Only the first rendered page of this essay was available.)

• Sonawala writes from the bullion trade’s viewpoint as Vice-President of the Bombay Bullion Association.
• Government gold sale aims to curb inflation (siphoning surplus money into ‘dead’ gold investment) and check smuggling.
• Rebuts the claim that selling gold encourages black money, calling it a harmless outlet instead.
• Government gold stock derives mainly from confiscated contraband or domestic mining; RBI’s idle gold serves no useful function.
• Only the first page (printed p.18) of this Q&A essay was in the rendered chunk.

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