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Defining Gold in Gold Policy

Nirupama Soundararajan, Senior Fellow, Pahle India Foundation Arindam Goswami, Fellow, Pahle India Foundation


India’s affinity to gold is well known. Like real estate, it serves as a traditional means of saving. It also provides a sense of security. The purchase of gold is considered auspicious, and hence gold is purchased at every occasion. Over centuries, India has amassed above ground stocks of gold; the most conservative estimate stands at 18,000 tonnes. Despite this India has little or no role to play in the international market for gold – neither in influencing price nor in influencing trade. This is predominantly on account of two reasons. First, no one thought gold could play a significant part in the economy. Infact, it has almost always been called an unproductive asset. Second, the country does sadly lack standardisation, transparency, and consistency when it comes to quality and price setting. This stems from the fact that the gold ecosystem per se lacks both cogent approach and concrete policy.

However, things are expected to change with the Finance Minster’s call for developing a comprehensive gold policy for India, which was announced during the Union Budget of 2018. The idea for a comprehensive gold policy was mooted by the authors in 2012. Five years hence, after many consultations, the recommendation comes to fruition. It is widely believed that a comprehensive gold policy in the country will not only create the necessary regulatory regime for gold but will also help in developing a dynamic gold value chain. The challenge however will be to develop a policy that is inclusive and encompasses the vision of all stakeholders of gold i.e. the industry, the consumers and the policymakers.

Ideally, a good gold policy should take care of five basic objectives. First, it should formulate a course of action for meeting the growing demand for gold. Second, it should look to increase the value addition of gold to the economy. Third, it should look at ways in which gold can contribute more to the exchequer. Fourth, it should lay down a roadmap of how to convert gold from being an unproductive asset to a productive financial asset. Fifth, it must ensure consumer protection. These objectives would lay the foundation upon which a comprehensive gold policy and a new regulatory regime for gold will be built.

A good starting point for the gold policy will be to define gold for the purpose of regulation and for policymaking. A new regulatory regime must be one that encapsulates all characteristics of gold. Currently, as a commodity, gold falls under the purview of the Ministry of Consumer Affairs. Financial products of gold, such as exchange traded funds (ETFs) and gold futures (that have their underlying as gold) come under the purview of SEBI. The procurement of gold comes under the purview of Ministry of Commerce, mainly the Directorate General of Foreign Trade (DGFT) and Reserve Bank of India (RBI). Ironically, the Ministry of Finance, until recently, has had little role to play in the regulation of gold. Refineries are accredited by NABL and quality of gold is regulated by BIS. Defining gold will be an essential step in assigning the responsibility of regulating gold to a single entity.

Gold is many things to many people, but whatever its form and shape, it has been the ultimate  storehouse of value and currency for centuries, an investment for some, but predominantly an insurance to  protect the holder against any form of potential disaster. The first principal of a gold policy or to creating a regulatory regime for gold is to acknowledge and manage its multiple functions in the economy, each with its specific characteristics.

Currently, there is no law that defines gold. India came closest to defining gold in the Gold Control Act (Act No. 18) of 1965, Section 2, where gold,“…meant gold, including its alloy, whether virgin, melted, re-melted, wrought or unwrought in any shape or form, of a purity of not less than nine carats and includes any gold coin (whether legal tender or not), any ornament and any other article of gold.” The Act further defines primary gold,“…as old in any unfinished form and includes all ingots, bars, blocks, slabs, billets, shots, pellets, rods and wires.”This definition is almost half a century old, (for an Act which has been suspended many years back),and only encapsulates the basics of gold as a commodity.

Globally, gold transactions within the financial system and control are akin to currency transactions, hence non-taxable. When processed and sold to consumer, it becomes a store house of value outside the financial system and conventional tax treatment applies. Irrespective of tax treatment at various stages of its value chain, gold is indestructible, which sets it apart from the typical consumer-based commodity. A definition of gold must encapsulate all these aspects too.


Defining gold as a currency may not feasible since that would bring with it issues related to convertibility and legal tender status. However, gold can be viewed as a security. Gold acts as an underlying for several securities, such as derivative contracts and exchange traded funds, but in itself, it has never quite been viewed or treated as a security. A new definition for gold must consider gold as a security too, more so since gold can be held digitally these days. With proper policy directive, the option to dematerialise gold will soon be a possibility. The moment gold is dematerialised retail customers will be able to trade their dematerialised gold on the (upcoming spot) exchange. A new definition of gold must necessarily define gold both as a commodity and as security.

Our recommendation for the definition of gold is that for all policy and taxation purposes gold must be treated as a security when in the financial system and as a commodity when outside the financial system. Once we have a definition in place the policy can concentrate on creating the necessary infrastructure such as bullion spot exchange, bullion banks, bullion vaults, and bullion domestic circulation, and specialised regulations to establish a holistic gold ecosystem in the country.

To be continued….


Disclaimer: Views are personal and not the views of the publisher.