Indians' love for gold is well known. In fact, the soaring gold imports were one of the prime reasons for high current account deficit in recent years. In fact, it had also resulted in a crisis-like situation during 2013.
As per an article in Mint, India is one of the largest consumers of gold, and imports around 800-1,000 tonnes per annum. Taking a note of this demand and its potential impact on the country, the Finance Minister Mr. Arun Jaitley proposed for a scheme in his budget speech in February 2015. The government has accordingly, come up with gold monetizing scheme (GMS) guidelines recently.
As per the guidelines of this scheme, the government intends to monetize gold by offering interest on gold deposits made with banks. One must note that around 20,000 tonnes of gold is lying idle. In one of our recent 5-minutes wrap up, we have discussed government's proposed gold monetization scheme and its benefits to the government. While the government steps are in right direction, will this scheme be successful?
This is how gold monetization scheme will work...
As per government's proposal, the Gold collected under this scheme will be tested. After the tests, consumers can deposit the gold under the scheme for a fee. The minimum quantity of gold that a customer can bring is proposed to be set at 30 grams. A certificate will be issued to the investor which will have details of the amount and purity of the deposited gold. Banks will open a 'Gold Savings Account' on such certificates. The interest on the gold will be deposited in this account. However, the amount of interest rate will be upon the bank to decide. This benefit would be in the form of gold. Say for example if an investor deposits 50 grams of gold at interest rate of 2%, on maturity he will have, 51 grams. This account will be exempt from the capital gains, and other taxes.
This collected gold will be made available to jewelers for manufacturing of new jewellery and other items. This in turn is expected to reduce the gold imports in the country.
But there are some caveats for the success of the scheme. One since the interest rate is discretionary on the banks, investors would opt for this scheme only if they get attractive rate of return. We have already seen a case in past, that did not attract investors due to low interest rates. Further, banks will have to hedge since the investors will have the option of taking gold on maturity. This will entail additional costs on the bank. Over and above, the people in India tend to purchase gold for socio economic reasons rather than as an investment. These factors will be playing key role in the success of the scheme.