Tiding over economic crisis

Economic uncertainty unleashed by COVID pandemic is fast transforming into an economic depression. The pandemic primarily being an unprecedented health emergency, disrupted all major economic chains not only globally, but at local level also, bringing almost all economic activities to a grinding halt. As the health emergency continues to baffle health experts and are clueless in finding its treatment protocol, the pandemic has simultaneously created havoc with economic sectors where millions of job losses and loss of income have been rampant.

Notably, economy was already suffering from slowdown before the onset of coronavirus outbreak. This unforeseen outbreak added more to the woes of the economic slowdown and hastened economic recession. In fact, the pandemic exposed the depression in which the economy had already slipped and its impact was slowly emerging on the surface.

As we understand the depression, it’s a prolonged period of high unemployment, low output, investment , depressed business confidence, widespread business failures and falling prices. We have no alternative but to accept the fact that this economic depression is going to stay as disruptions in economic supply chains continue, businesses either witnessing drastic cut in size of operations or closing down in absence of financial resources and huge army of migrant workers unwilling to return quickly to their workplaces. The worst scenario is that the pandemic is still raging and spreading to the hinterland  with vaccine and cure nowhere in the horizon. This means, the pandemic-induced economic depression is going to stay on long term basis and the government stands caught in a precarious situation where out of box economic packages customized for every economic sector have become imperative. Here the tough challenge is to protect the interests of general public while refueling the economy with resources.

Anticipating the worst form of economic depression, the government has already engaged itself to tailor and roll out various stimulus packages to keep the wheel of economy going to some extent. However, the introduction of these stimulus packages and other economic measures taken so far have not given the desired results. The most worrying part is that banks form the backbone of such packages and the banks are already facing threat to their existence as their asset quality, which was already under stress in pre-COVID situation, is on the verge of further deterioration. The repayment of loans, whether retail or corporate, seems a distant dream at the moment as the economic lockdown has failed the individuals as well as the entities to generate income. Precisely, experts have already flagged the banking system red fearing a collapse of some major banks hit by mounting bad loans and loss of capital.

Amid this unprecedented loss of economic growth and massive job losses, the resource mobilization to revive economic activities is reaching a panic-stricken scale. It’s  a herculean task for the government to keep customizing packages loaded  with different essentials and monetary support with a focus on the diverse nature of the needs and requirements of its citizens.

If recent media reports are to be believed, the government is contemplating to lay hand on the gold held by households in the shape of jewelry and other form. Bloomberg reported that India’s Finance Ministry is considering an amnesty program for residents with illicit stash of gold, as part of an effort to crack down on tax evasion and cut its dependence on imports, according to people with knowledge of the matter.

Under the proposition made to Prime Minister Narendra Modi, the government plans to ask people with unaccounted holdings of the metal to declare it to tax authorities and pay levies, penalty, the people said, asking not to be identified citing rules on speaking to the media. The proposal is at an early stage and authorities are seeking feedback from concerned officials, they said. Consumers who declare their hoard will need to deposit some of the legalized gold with the government for a few years, they said.

Notably, gold has soared almost 30% to a record this year as the pandemic drove demand for havens amid a weaker dollar and low interest rates. With more stimulus on the horizon, Goldman Sachs Group Inc. has said that bullion is the currency of last resort and forecasts a surge to $2,300 an ounce.

In this most economic distressful situation exploring the possibilities around gold are currently being focussed. Experts are weighing official gold holdings, held by the Reserve Bank of India (RBI), coupled with the private stock of gold in Indian households as a significant resource to refuel the engine of economic sectors.

Reports have assessed that households in India possess 24,000 to 25,000 tonnes of gold and account for 25 percent of the global market demand.

Remarkably, while leveraging the domestic possession of gold, the government in the past few years launched initiatives to remonetize this gold. Different schemes, such as Sovereign Gold Bond, Gold Coins and Gold Monetisation Schemes (GMS) were introduced, but the results were not encouraging. Now the government, as indicated in the media reports and keeping the past attempts to monetize the yellow metal in possession of households, is seriously working out ways and means to tap the tap the market potential of gold in these difficult times to support the ailing economy.

The rumors have already been doing rounds that the government may repeat an act similar to demonetization where households will be forced to disclose their gold holding to the authorities. An element of fear has started unnerving the general public which authorities believe are in possession of 25000 tonnes of unproductive gold. In the past also, such fears loomed large but government authorities dispelled such rumors.

Let me reproduce an official statement which was dished out last year when strong rumors were doing rounds that government was planning a surgical strike of households in possession of undisclosed gold holdings.

It is unlikely that the government could be planning a ‘surgical strike’ on hoarding of gold by Indian residents. Nor, is a demonetisation-like move or an amnesty scheme likely to be rolled out in the near future, read the statement. While describing the position of the Income Tax law with respect to gold jewelry, the statement reads: “There is no limit on holding of gold jewellery or ornaments by anybody provided it is acquired from explained sources of income, including inheritance. Vide circular dated 11/5/1994, instructions have been issued in the matter of search and seizure of gold jewelry. Ornaments and jewellery to the extent of 500 gm for a married lady, 250 gm for an unmarried lady and 100 gm for a male member would not be seized, even if prima facie, it does not seem to match the income record of the assessee. The officer conducting the search has the discretion not to seize even higher quantity of gold jewellery based on factors, including family customs and traditions.”

Here it’s to be understood that the pandemic has brought in miseries to every household, be it rich or poor. Efforts to pull the economy out of the deep crisis, especially when plans are being worked out to remonetize household gold, should not hurt common citizens’ interest in any manner. Need of the hour is to put a liberal gold policy in place. Forcibly flushing this 25000 tonnes of gold in possession of households out or tax it will lead to unrest among citizens where they will feel unsafe for their assets and at the same time financial markets too will get impacted.

(The views are of the author & not the institution he works for)