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Will the monetization scheme reduce gold imports?
May 20, 2015


One of the biggest reasons why India's current account deficit has been under so much pressure is because of oil and gold imports. The erstwhile UPA government chose to resolve this issue by placing curbs on gold imports. But this did not really achieve much and instead heightened the chances of smuggling. Once the Modi government came into power, these curbs were lifted. However, the problem of rising gold imports exerting pressure on the current account balance exists. As can be seen from the chart, barring a few months, gold imports have largely been on the higher side.

The government is serious about reducing the deficit. And so one idea that it intends to follow up on is the monetization of gold. As reported in the Hindi Business Line, Around 20,000 tonnes of gold are lying idle. This is neither traded nor monetized and is lying in lockers.

The government intends to monetize this by offering interest on gold deposits made with banks. This interest will be exempt from income-tax and capital gains tax. Now such a scheme had been introduced in the past as well but did not meet with much success because of the low interest rate offered. So, it will be interesting to see how the government intends to make this scheme attractive this time around.

Further, the gold that the government collects though this scheme will be lent to jewelers, thus alleviating the latter's need to import the same. However, here again, jewelers will borrow gold from the government depending on how favourable the terms of lending are. Thus, while the efforts of the government are in the right direction, executing this scheme well will be the key.

Data Source: The Hindu Business Line

This Chart Of The Day was published in The 5 Minute WrapUp - How avoiding 'wide deliveries' can improve your investment record

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