Month: May 2015

The Finance Ministry published a draft on the Gold Monetization Scheme that the finance minister had spoken about during the recent budget.

The big idea behind gold monetization is that India produces almost no gold and imports massive amounts of it — up to a thousand tons a year — this leads to a big trade deficit, and if there were some way to channelize the idle gold lying with households and temples etc. that would go a long way in helping this hole.

The idea is definitely very good, and I’m sure all of us have jokingly discussed this at one point or the other. The difficulty lies, as it always lies, with the execution.

To that extent, I think the ministry has come out with a good first draft although I think right now this idea is more beneficial to temples etc. than it is to households.

I say that because in order to put your gold to work you have to agree to have it melted, and in general you won’t find many households who are willing to have their gold melted even if it promised them an interest. The interest is not likely to be very high for these schemes, and at one or two percent per year, I just don’t see many families doing that.

Religious institutions however are a different kettle of fish altogether, and I do believe that a lot of them will eventually take a pragmatic stance on this, and monetize their gold. Eventually is the key word here because this has never been tried before and it will take time to gain acceptance of the idea. Most readers will remember the skepticism surrounding gold ETFs in the early days, but now it finds its way in the portfolio of most investors.

For those who are willing to have their gold melted, here is a brief overview of how the process is going to work.

1. You take your gold to a purity testing center and they will tell you how much pure gold there is in your ornament.
2. If you agree to go forward, your jewellery will be stripped off studs etc. – anything which is not gold, and then melted down to pure gold.
3. Now they tell you the purity and weight a second time, and you can either accept that and deposit your gold, or take back the melted bars.
4. If you accept it and deposit the gold then you will be given a certificate of the purity and quantity of the gold and no fee will be charged for melting. In this case the bank pays the melting fees. You don’t get your gold back in this case.
5. Next, you take this gold certificate to a bank and they open a Gold Savings Account for you.
6. Bank pays you interest as well as principal in gold.
7. You live happily ever after.

The government is going to exempt the interest income as well as any gains in principal from Wealth Tax, Capital Gains as well as Income Tax. So, to that extent, the tax angle on this is extremely good.

The process described in the draft document shows that it will take you about a couple of days to do this and the cost will be about a thousand rupees or so. Right now, there aren’t those many centers and of course you have to wait and see how many banks open this kind of account. The other big variable is the interest rate, and how much interest can the bank really gives out on these type of deposits.

I don’t think this scheme is going to be very popular with households in its current form, not unless the rate of interest is very appealing, but I do believe it is a great first step in what could really put to work tons of gold lying idle in India’s religious institutions.

The China pitstop has perhaps been the most interesting in our globe trotting PM’s itinerary. The beginning wasn’t as exciting for its substance as it was for its selfie opportunities, and even though a couple dozen government to government MOUs were announced, it is hard to get excited about an agreement between Doordarshan and China Central Television Corporation or even a yoga college in China.

The primary criticism I saw of these MOUs was that these were nothing more than a framework to do something sometime in the future, and most of them don’t translate into anything tangible, and it does seem that this criticism is fair.

Another criticism has been the lack of progress made on difficult issues like border disputes, China flexing its muscle in the Indian Ocean, stapling visas on residents of Arunachal Pradesh, building roads in POK and I believe nothing revealed in public gives any reason to think that China is rethinking any of its moves in those directions.

Finally,  the issue of India’s increasing trade deficit with China which is to the tune of $38 billion dollars last year was also brought up but this is one area where I think talks are not going to help much. The trade deficit exists because there is an imbalance in the manufacturing capabilities of the two countries, and China is much better at manufacturing than India, and as long as that remains true there will be an imbalance. This is a problem whose solution lies inwards, not external.

There was however one tangible piece of action, and that was with the announcement of the commercial contracts which are estimated to be around $22 billion and are to be executed between Indian and Chinese companies.

They have substance, and the list of the MOUs shows that they include varied companies and sectors, and I feel that this is a very good outcome for the visit.

The most interesting aspect of this investment is that it is of a somewhat equal nature unlike most other big announcements that come out of China.

I say equal to mean that this is not simply the case of Chinese companies building infrastructure in a foreign country which is usually how these things are but rather a mix of investments from Indian companies in China like Wipro or Infosys, investments from Chinese companies in India in partnership with Indian companies like the solar power co-operation between Welspun and Trina Solar, and financing deals like the one Bharti got from China Development Bank.

Contrast this to the $46 billion investment that China pledged to Pakistan recently to build infrastructure in that country, or the $50 billion China recently announced to spend in Brazil and the difference is clear.

To take the Brazilian example, look at this excerpt from the BBC article about this. 

China is planning to invest up to $50bn (£32bn) in Brazil for new infrastructure projects.

The deal is due to be signed by banks from both countries during a visit by Chinese Prime Minister Li Keqiang to Brazil next week.

The money will go towards building a railway link from Brazil’s Atlantic coast to the Pacific coast of Peru to reduce the cost of exports to China.

I believe the deals that Indian companies have signed are a positive outcome, and should translate into meaningful progress in the next few years. The scale is big enough to make a difference, and the nature of these transactions are such that they keep India on an equal footing with China with respect to these deals.

Rajya Sabha cleared the Black Money Bill today, which is officially Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015, and this is perhaps the only piece of legislation which the Congress finds itself unable to oppose.

The finance minister had first talked about this Bill earlier in the year, and the bill has been introduced to bring back black money stashed overseas and to that extent you don’t normally think a regular white collar workers with all their money in white will have any direct impact by it.

The draft itself talks about an exemption up to a limit of Rs. 5 lakhs in reporting foreign assets or money, but that is not very much money, and a lot of people who may have worked abroad for any length of time may have a lot more than that on which taxes have been paid in the foreign country.

The existing income tax laws require you to disclose your foreign assets and income in your tax filing but that is recent change and something that has not been really enforced yet. The IT form itself has space to make this disclosure, but not many people have been doing it.

Photo: Tax Credits

This is pertinent because there is no clear definition of ‘undisclosed income’ and while the intent of this bill is not the small fish, I think you can easily interpret undisclosed income to mean money in your foreign accounts that have not been declared in Indian IT forms.

This issue was raised by the opposition and a clarification was given on it by the finance minister, who said the following:

“we don’t want to proceed against trivial violations. But then the big fish must not get away in the garb. “Let us not fire from the shoulders of these innocent students in order to make sure that no harsh action is taken on the big fish itself.”

I believe I’m not alone in my fears of harrassment as there have been reports that corporates have also expressed these same fears.

However, there have been amendments to the original bill which are not public as far as I know that do safeguard companies and individuals against such harrassment. Specifically, Livemint reported these things that I think are very important: 

The government also approved amending the bill to curb tax evasion within India at a cabinet meeting held on Wednesday…

…Students and non-resident Indians and professionals working abroad will not be covered under the black money bill. “Only resident tax payers who are liable for assessment under income-tax act and those who spend more than 182 days in India will be under the ambit of the bill,” he said.

When the Act is available, I will read it and do a follow up post, but as of today, it doesn’t seem like there is a real threat that the Black Money Bill can be used for harrassment of regular folks.