The government should deploy a safety net
During the first wave of Covid, the country witnessed an increase in gold lending to overcome the cash shortage. But this time around, in the second wave, there was a change of course – outright selling of gold.
The warning signs are grim and the government shouldn’t behave like an ostrich. Increased gold loans can not only signify distress, but also the confidence that the economy would generate sufficient income to pay them back.
However, the increase in gold sales signifies both distress and a lack of confidence that there would be enough income to pay off the loan. It’s worrying.
Raw scrap supplies, which include old gold melted to make new models, could exceed 215 tonnes and reach their highest level in nine years if a new wave emerges, said Chirag Sheth, consultant at Metals Focus Ltd, based in London.
In a first sign of consumer stress, Manappuram Finance, one of the country’s largest gold lending providers, has auctioned 4.04 billion rupees ($ 54 million) of gold over the years. three months until March from loans that turned sour following a sharp drop in prices.
This compares to just 80 million rupees sold at auction in the previous nine months. The jewelry was sold because Manappuram’s borrowers – usually day laborers, small entrepreneurs and farmers – could not afford to repay the money.
In southern India, the country’s largest per capita consumer, around 25% more old gold than usual has been sold to jewelers, according to James Jose, general manager of Kochi-based CGR Metalloys refinery.
They are dark straws in the wind. The third wave, the arrival of which is apprehensively awaited, can only further fuel this trend.
Selling family money, so to speak, is never a happy decision, especially for rural people for whom the only known safe investment is the yellow metal. They lie in shabby lofts, fearing not the taxman as is the case with city dwellers, but local dacoits and thieves.
They are for them the safe haven, the rain check. Now they are tumbling down and being lapped by the greedy local goldsmith, who often acts as a pawnshop, and by gold lending companies.
Surprisingly, this may have the effect of meeting the government’s elusive goal of stemming the outflow of foreign currency primarily to Switzerland for the import of gold, while the internal recirculation of gold fills the supply gap. nearly 100% national.
In that sense, he could have achieved what the Gold Monetization System (GMS) could not. Under GMS, gold deposited with the SBI generates a small interest but at a huge price – gold jewelry would be melted down – it’s a strict no-no with Indian women. It is a sad outcome that households that were reluctant to melt their gold were pushed to sell it to make ends meet.
What the government needs to do is deploy a safety net as quickly as possible by forcing the ubiquitous SBI as a bulwark against exploitation by greedy local money lenders, goldsmiths and sahus which dot our rural landscape and which all salivate at the idea of deceiving the gullible.
If the London Metal Exchange price governs the Indian buy price, it should also rule the sell price. But the Indian financial market is known for its yawning spread between the bid price and the ask price to such an extent that, whether it is in the currency or bullion market, the spread (the difference between the purchase price and the sale) is gaping.
Only a government body (read SBI) can intervene between the rural population and the farm. SBI has the means and the ability to buy now and sell later at a better time. We should not leave our rural gullible to the wolves.
It’s not as if city dwellers are immune to exploitation. They too would welcome the sale to SBI rather than a local exchange.