Gold Monetisation Scheme - Details and Critical Analysis

Gold Monetisation Scheme - Details and Critical Analysis

Question - Gold Monetisation Scheme was announced in the Budget 2015-2016. Discuss the terms of the schemes and steps announced for depositors of gold to earn interest in metal accounts in recent times and critically evaluate the Gold Monetisation Scheme.

About Gold Monetisation Scheme

• As per the scheme, deposited precious metals will be melted and gold in jewellery will be credited in the depositor’s name

• Interest will be earned on value of gold on the day of deposit

• Investor would also be paid cash equivalent to gold’s value on the day if withdrawal from scheme or its maturity nears

• Scheme will enable depositor to earn income from gold holdings while basic investment is safe

• It will also help companies, temple trusts and other such organisations to unlock gold holdings

• Gold Monetisation Scheme will replace Gold Deposit and Gold Metal Loan Schemes

• New scheme will allow gold depositors to earn interest in metal accounts and jewellers to obtain loans in their metal accounts

• Banks and dealers would also be able to monetise the gold

• Loan against gold for agricultural purposes is a loan product where owner of gold can avail loan against it; in the GMS scheme, owner will earn income on deposited gold

• There is no material impact on existing loan against gold product of bank as a result of GMS

Other Steps and Schemes

• Budget 2015-2016 announced other proposals to convert gold holdings into cash to spur spending and investment, limiting the need to import gold

• Introduction of indigenously made Indian Gold Coin bearing the Ashok Chakra was announced reducing the need for importing gold coins

• Another initiative was the Sovereign Gold Bond which will enable investors to trade in gold without physically purchasing it

• Sovereign Gold Bond will work like a regular coupon bearing bond; government issues these to borrow money for numerous purposes
• Government receives money from investors who invest in the bond and pay fixed periodic interest known as coupon on it.

• On maturity, money is returned to investors. Accordingly, in the gold bond, investors such as households will be able to lend money to the government through bond investment where price will be associated with price of fixed gold quantity

• On these, there will be periodic receipt of a coupon estimated at 1.5 to 2 percent. Following maturity and sale of bond. bond holder will get an amount equal to the value of underlying amount of gold on that specific date

• Bond holders will get similar returns such as buying gold bars/coins and selling them later at a profit

Advantages of Sovereign Gold Bond scheme

- The scheme will eliminate the need for importing gold for investment purposes
- People currently buy gold as investment when it is imported from outside
- Outflow of forex and increase in current account deficit would result
- Entire transaction will remove the need for buying imported gold

Critical Evaluation of GMS

• Money is periodically deposited in bank accounts and interest is received in return
• Bank uses there deposits to make loans and receive interest

Pros

• This scheme will reduce dependance on imported gold; India imports 97% of its annual gold demand

• It will present a drain of forex reserves and protect the value of the rupee

• Around 20,000 tonnes of gold is stashed away and this gold needs to circulate in the economy and be lent to those who need it

• Stocks of gold jewellery represent notional wealth as it does not contribute to growth and neither can it be spent or invested

• Gold deposit scheme can also attract deposits worth INR 1 lakh crore; gold will be converted into cash in form of interests

• Gold owners can then use this for spending and ensure productive lending from banks

• Scheme can add 2 percent to the GDP

• There is also need to ensure high quality of gold and establish gold standards; this scheme will accomplish this effectively
• Responsibility could be assigned to designated corporation to channelise gold imports and ensure high quality of gold

Areas of Improvement

• GMS could have two parts-outright purchase of gold or loan against gold deposits

• Another important part would be awareness of the scheme, location of assaying centres and rate at which gold is bought or loans are offered

• GMS should operate through banks as bank accounts are available under the PMJDY

• This will wean away consumers from pawn brokers

• GMS could be a move to unlock black money and amount of gold offered to public could decrease; to prevent this, government should consider making a provision that amount of gold less than 100 grams does not require identification documents

• India needs to employ foreign earning for import of capital goods for enhancing production and growth and not linking to consumption items such as gold

• Extensive research needs to be conducted as gold buying preferences differ regionally and schemes could create employment opportunities for gold fabricators, assayers and outlets.

• India will also become a regional hub in gold refining and recycling

• High import duty should be considered to reduce chances of smuggling; this will also enhance custom duty collections

• Monetising gold will unlock high volume of dormant money to boost the economy and provide liquidity to micro-enterprises

• Past wealth tax payment should not be required for trading in gold

• GMS needs time for implementation as well as solid infrastructure; gold collected under GMS has to be stored, transported and delivered through secure and safe supply chain ranging from point of procurement to last mile delivery

• GMS also needs a network of gold purity verification centres as well as world class fabrication facility and storage as well as distribution services

Facts and Stats

• India is amidst the largest consumers of gold in the world

• It imports at least USD 34.3 billion worth of precious metal for the fiscal ending March 31, 2015

• Gold and jewellery business in India is fragmented and unorganised

• Nearly 96% of these businesses are family owned

• India has around 16,000 gold dealers, 450,000 goldsmiths and more than 200,000 jewellery outlets for gold

• Bureau of Indian Standards (BIS), with headquarters in New Delhi, have been hallmarking gold jewellery since the year 2000 through 221 centres in 84 cities; This is insufficient for the size of the nation.