Government sells confiscated gold to ease debt situation

Confiscated gold: Large reservesIt wasn't exactly a sale of family jewels, but it made headline news last fortnight. All the Government did was sell off 20 tonnes of confiscated gold at international prices, and picked up $215 million (approximately Rs 430 crore) in much-needed hard currency.This, say Finance Ministry officials, will go to pay for interest and short-term loan repayments for India's massive $70 billion foreign debt. The move appears to be prudent. But political parties went to town on it - despite Finance Minister Yashwant Sinha's assurance that confiscated gold, not the RBI'S actual gold reserves of 332.5 tonnes, was sold - demanding details and a probe.The decision to sell the gold was taken by the Cabinet Committee on Economic Affairs, headed by Sinha, after obtaining a verbal go-ahead from Prime Minister Chandra Shekhar. The fact is, there is nothing to it. First, the gold is mortgaged, not sold outright.The State Bank of India (SBI), through which the gold was routed, has entered into a swap deal with Zurich-based Union Bank of Switzerland. Basically, it means SBI has an option to buy back the gold in the future, while using its cashed value now, at an interest rate of 6.33 points over the London Inter Bank Offered Rate, making it cheaper than other means of raising quick foreign exchange. Even if the SBI doesn't pay back, the gold lost would have served its purpose. Besides, the bank has 10 tonnes more of confiscated gold in stock. That still leaves 40 tonnes of confiscated gold, and though 18 tonnes have been earmarked for sale to the jewellery trade and another 7.5 tonnes for inclusion in the official reserves, in an emergency, a further 14.5 tonnes is available for sale.Even if this isn't enough, the Government can actually draw upon a part of its official reserves, a provision in the Reserve Bank of India Act, 1934. Says C. Rangarajan, RBI deputy governor: "The RBI is empowered by the Government to keep 15 per cent of its gold reserves outside the country for mortgaging purposes."A country's gold reserve position indicates its ability to convert it into liquid cash in an emergency. Besides, several countries, including the US, Australia and Italy, have pledged part of their reserves to overcome balance of payments crises.There is yet another reserve to tap: seized gold at the pre-confiscation stage. Confiscation of seized gold takes place only after adjudication of the seizure is through. About 100 tonnes of seized gold is presently stored in the Directorate of Revenue Intelligence (DRI) and Customs vaults. In 1990, 5.5 tonnes of gold was seized.According to DRI officials, the threat of seizures and confiscation won't deter smugglers. As long as the domestic price of gold continues to fetch 40 per cent higher rate than international prices, smuggling will continue. The Government may prefer this easy route to reserves. At least it clears debts.Published By: AtMigration Published On: Jun 30, 1991 00:00 IST--- ENDS ---

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Government sells confiscated gold to ease debt situation

Easing the debt situation.

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