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The Only Way to Stop Indians Buying Gold? Take Away Their Cash

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Prime Minister Narendra Modi’s government spent 16 months trying to persuade Indians to deposit their jewelry in the bank to earn interest, in an effort to curb soaring imports of the precious metal. But the program has only lured a tiny fraction of the $900 billion of gold that families and temples are estimated to have stashed away. On the other hand, Modi’s controversial decision to withdraw all high-value banknotes did the job instead.

Coupled with a higher import tax, the abolition of 86 percent of the nation’s banknotes in an anti-corruption drive helped push gold imports down 39 percent last year to 558 metric tons. Overall consumption in India tumbled to 676 tons, the lowest since 2009, according to the World Gold Council.

That’s bought Modi some breathing space to persuade Indians to recycle their gold in a country where jewelry plays an important role in weddings and festivals and is handed down to daughters for their own weddings.

“We Indians don’t like to sell our gold,” said Samsher Aliyar, a 29-year-old Mumbai cab driver. “My grandmother’s generation and even my parents aren’t going to deposit their gold with the banks as they consider it a part of their children’s inheritance. In a worst case scenario, we would take a loan on it.”

Modi set up the plan in November 2015 to try to curb India’s massive annual imports of the precious metal that were contributing to a record high current-account deficit and a slump in the rupee. But so far it’s only lured about 6 tons in the past year out of the 24,000 tons the World Gold Council estimates is locked away in India’s houses and temples.

“The government tried, but the people are not coming forward,” Devendra Kumar Pant, chief economist at India Ratings & Research Pvt., the local unit of Fitch Ratings, said by phone from New Delhi. The government is under less pressure to fix it because “the position right now on the current-account side is relatively comfortable.”

If the gold deposit system is going to work, banks and refiners need to improve awareness of the system and make it easier for customers to use, said Rajesh Khosla, managing director of the country’s biggest bullion refiner, MMTC-Pamp India Pvt. Ltd., and a member of the industry committee that the government consulted when defining the plan.

This isn’t the first time India offered an interest rate for gold deposits. A similar plan run by the SBI since 1999 lured just 8 tons, according to the bank. That program required investors to deposit a minimum 500 grams as opposed to 30 grams under the new system.

The damping effect of Modi’s banknote withdrawal may not hold back the tide of gold imports for long and the banks will need to improve the deposit system if it’s to have a meaningful effect. Demand in the world’s second-biggest gold market this year is forecast to be between 650 tons to 750 tons.

It will take time for refineries, assayers and banks to develop the system, and they need to make it easier to use and build trust with customers, the World Gold Council said in a report in January. Once the infrastructure is in place, the council predicts as much as 25 tons could be monetized within two to three years.

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