Background:

The Indian government's revenue collection has taken a toll due to the impact of novel coronavirus and the lockdown. It is expected that the Indian economy will contract by 4-4.5% in FY21 due to which India's debt to GDP ratio is expected to increase from 72% to 84% for FY 2019-20, which is approximately 30% more than countries having similar sovereign ratings (indicates the risk level of investing in a country). Due to increasing debt levels, declining tax collections and lower GDP growth in the medium-term, Moody's recently downgraded India's sovereign rating from Baa2 to Baa3 and Fitch changed its stance to 'negative' from 'stable' while retaining the same rating.

 The funding problem:

Like many countries, India too recently announced an economic stimulus of INR 20 lakh crore ~ 10% of the GDP and as per the Chief Economic Advisor of India, another stimulus package is also expected soon. Broadly there are two primary sources of funding the stimulus package-
1. Increasing borrowing
2. Printing currency

Keeping in mind the current sovereign rating and the economic condition, borrowing makes little sense and many economists recently have urged RBI to print currency like the US Fed which has printed close to $3 trillion since the start of the pandemic.
But INR can't be printed with the same ease as the USD, because the latter has a massive demand in the world (majorly due to petrodollars) and also backing of the US government. To print INR, RBI needs to ensure confidence amongst the currency holder for which it needs to have adequate gold or foreign exchange reserves.

 Solution: Gold to the Rescue
Gold is considered as a safe haven and its value rises whenever there is any uncertainty in the economy or when the stock market falls. Currently, the price of gold in India has reached an all-time high of around INR 50,000/10g, leading to an increase in its selling activity due to the absence of liquidity in the economy. As per estimates, India holds about 1/8th of the world's gold, i.e. 25,000 tonnes, which is worth $1.5 trillion. If the government is even able to buy 10% of this gold directly from the households by institutionalizing the selling process through banking channels, provided no questions are asked about the source of the gold, then it can be used as a collateral for printing a few trillion and funding the stimulus package.

 This move will have the following benefits- 

• It will help India in protecting its sovereign rating, print more money without any fiscal pressure and infuse money into the economy.

• Unproductive gold lying with the households will be monetized. 

Atticus_AdminTue. 
27/04/2021