Can the ideas behind gold deposits and other proposals to wean away the demand for gold through financial products be relevant for senior citizens?

The Financial Scene of last week on the challenges posed by unbridled gold imports has elicited a large response. The central theme of the column was that the increasing clamour for policy actions, by themselves, will not be enough to dampen gold demand in this country. By many yardsticks, gold imports have reached such dimensions that they pose a threat to macroeconomic stability. The column drew substantially from a recent report of an expert committee constituted by the Reserve Bank of India (The report is available on the RBI website).

Two responses among the several that were received are discussed below.

K. U. B. Rao, who is the convenor of the RBI’s gold report, has re-emphasised the key points, namely, (1) that inflation is the prime culprit driving up gold demand; (2) As of now there is really no substitute to wean away the demand for gold (due to return, liquidity, no TDS, no documentation, no capital gains and more importantly no one knows how much I have purchased); and (3) Choking gold supply through higher customs duty or any other form of control is not the right way without going “into the genesis of high demand”.

Mr. Rao’s succinct summary of the key points is worth taking an even closer look than before. In this connection, we find a contextual significance in the patently justified request of senior citizens to have bank deposit schemes that protect them from inflation by offering appropriate yields.

Far-fetched connection

The connection between bank deposits on which most senior citizens depend exclusively for their livelihood and gold investments may seem far-fetched. After all, senior citizens can hardly be expected to hold or buy gold to hedge against inflation. Even the gold-backed deposit schemes, which are likely to be introduced, will hold no specific attraction to the pensioners and others solely dependent on interest from bank deposits.

Yet, tackling this very basic need of senior citizens — to have schemes that are hassle free and protect them from inflation — is on a par with efforts to wean away gold demand. Unless a scheme is created that will effectively and consistently be able to beat inflation and equally importantly convince ordinary citizens that it will be able to do so over time, it has no chance of succeeding in the race against gold. The senior citizens as a class may not patronise gold but certainly have a stake in any policy measure that will give them an opportunity to keep their head above water. Any savings during their working life can be invested in a scheme that will give a sure above inflation return. The message is very similar to those who want to invest in gold only for the purpose of investment. At this stage, one is not sure whether a majority of gold investors will opt for gold-backed schemes but it is worth a try.

Straightforward solution

For senior citizens, the solution can be more straightforward. The RBI already offers a bond scheme with interest of 8 per cent, payable half-yearly. A tax free variant offered earlier has been discontinued

S. Krishnan, a senior citizen himself, has spent a lot of time and energy in making the following suggestions: (1) Revive the tax free bond scheme, but with a much higher interest of, say, 12 per cent. Apart from the RBI, banks can offer the scheme; (2) The tenor can be sufficiently long so to enable the financial institution to take advantage of long period funds; (3) In the event of such a scheme being introduced, senior citizens should be allowed to foreclose their existing deposits without penalty only for the purpose of migrating to the new scheme; (4) Subscriber should be allowed to nominate more than one person; (5) Since the interest will be tax free, the senior citizens will be spared the hassle of TDS; (6) the success of the scheme will depend on the high-yield and equally importantly on whether it will remain fixed through the tenure of the scheme/bond; and (7) It goes without saying that interest should be paid quarterly. The tax offerings of several public sector undertakings, now on offer, are in an entirely different category. They pay below 8 per cent interest and that too on an annual basis.

A new scheme for senior citizens will have important social security implications. Any cosmetic half a per cent more that banks are offering on their deposits simply will not do. Finally, while the efforts to find an investment option that will channelise at least partially the craving for gold have been driven by macroeconomic considerations, senior citizens have never had a constituency to espouse their cause. Exclusive dependence on interest from bank deposits has led to a situation where banks take the senior citizens for granted. In the run up to the RBI credit policy announcement, the customary clamour for an interest rate cut has been joined in by some powerful voices. State Bank of India Chairman, for one, has advocated an interest rate cut. In his overall scheme of things, the bank’s borrowers deserve cheaper loans. That automatically means lower deposit rates. Depositors, especially senior citizens, can continue to be taken for granted. For want of any other option, their deposits will remain with the banks.