Gold Monetisation Scheme ImageIn ancient times, India was referred to as the ‘Golden Bird’. Explorers came to our country in search of gold mines. While not many gold mines exist in the country now, India’s love affair with the yellow metal has remained unperturbed over the centuries. If anything, the average Indian’s obsession with the bullion has often jeopardised India’s trade deficit due to the high value of gold imports into the country. By end-2012, news reports declared that Indian households had a reserve of about 20,000 tonnes of gold. This was estimated at about USD 1.16 trillion at the time. India is the largest consumer of gold in the world; in April 2015 alone gold imports were estimated at about USD 3.13 billion.

NDA Government’s Gold Monetisation Policy

Ever since the NDA government has taken over at the centre, it has promulgated a policy of monetisation of idle assets and converting the country’s vast holdings into cash. In his Budget speech of FY 2015-16, Finance Minister, Arun Jaitley, proposed to introduce a scheme that would help in gold monetisation and replace all other gold deposit schemes and gold loan schemes. In keeping with the budget proposals, the government of India introduced a draft scheme for gold monetisation under which any person or institution can earn interest on deposit of gold in banks. This means that individuals who hold gold coins, bars, and jewellery in bank lockers will now benefit by earning interest on their gold stocks and jewelers will find gold easily available with the banks for manufacturing gold items.

Gold Deposit Scheme

According to the draft guidelines of the Gold Deposit Scheme, individuals, households, and institutions will be able to take their gold in the form of coins, jewellery, bars, biscuits, etc. to the banks. The gold thus collected will be cleaned and tested (melted) for purity at BIS-approved hallmarking centres. At this point, consumers will have an option to deposit the gold with the banks or take it back after paying a nominal charge. The minimum quantity of gold that can be deposited for monetisation purposes by any individual or institution is 30 grams. The depositors will then be issued a certificate that mentions the amount and purity of the gold deposited by them.

Interest on the gold thus deposited will be credited into Gold Savings Accounts that the banks will open for the depositors within 30 to 60 days. The minimum term of deposit is 1 year (further terms in multiples of 1 year) but depositors will be allowed to prematurely break the deposit for a penalty charge. The interest rate on gold deposits has not yet been fixed. It has been left to the bank’s discretion to ascertain this interest rate.
The principal and the interest are both computed in terms of gold. This means that if interest on 100 grams gold is fixed at 3 percent, then the depositor will receive 103 grams of gold on maturity. At the time of making the gold deposit, the depositor will need to choose if the maturity benefits will be withdrawn in gold or in cash. Interest earned on the gold deposited by individuals and institutions will be exempt from income tax and capital gains tax. Gold depositors will need to complete the KYC (know-your-customer) process.

Lending to Gold Retailers

The banks that receive gold from depositors will be able to lend this gold to jewelers and retailers to fulfill their daily working needs and will receive an interest in return. This interest will be higher than the amount paid to depositors and the difference will be the bank’s income. Banks will also be able to deposit the gold received with the central bank (RBI) to meet the CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) requirements. Bank may convert the gold deposited with them into coins and sell these to their customers.

How Will the Scheme Help the Economy?

Indian households are estimated to hold about INR 60 lakh crore worth of gold that is “neither traded nor monetised”. Gold is part of ritual expenditures, dowries, and bequeathals and is horded. Monetising this gold has two major benefits. It allows for more liquidity in the market by allowing holders to earn from their assets. Secondly, this mobility is likely to slash India’s import bill significantly. India currently imports between 800 and 1000 tonnes of gold each year – often at great cost to the Current Account Deficit of the country. Vast quantities of gold are held by Indian temples and other religious institutions. It is believed that these institutions will also be able to benefit from the scheme and these reserves will be freed up for use by retailers.

The scheme is likely to be launched at select cities to start with and the government shall monitor its success while trying to set up the infrastructure required for its nationwide launch. One of the biggest challenges the government shall face is setting up secure centres for accepting these deposits, experts believe. The scheme guidelines are in a draft phase and the Finance Ministry has invited comments and suggestions from stakeholders by June 2.

Other Gold Plans

The Finance Minister had also announced, in his budget speech, the launch of a Sovereign Gold Bond as an alternate financial asset. This gold bond can be purchased as an alternative to buying metal gold. These bonds are likely to carry a fixed rate of interest. They can be redeemed by the buyer in terms of gold metal at the time of redemption.

Apart from this, Jaitley had also announced that the Government shall develop a standard Indian gold coin, with the Ashok Chakra embossed on its face. This coin shall carry a guarantee of the gold’s purity and reduce demand for gold coins imported from foreign countries

PM inaugurates 3 gold schemes

On 5 November 2015, Prime Minister Narendra Modi launched three gold related schemes.

Gold Monetisation Scheme (GMS) – The scheme replaced the existing Gold Deposit Scheme 1999. The deposits under the scheme will be allowed to run until maturity date or if the depositor does not withdraw them prematurely.

Sovereign Gold Bond Scheme – These bonds will be issued in different parts subject to the total borrowing limit of the Government of India. The first tranche for receiving applications for this scheme have been scheduled from 5-20 November, 2015. The bonds will be issued on 26 November 2015.

Gold Coin/Bullion Scheme – PM also launched India’s first national gold coin with National Emblem of Ashoka Chakra engraved on one side and Mahatma Gandhi on the other. The coins will be available in denomination of 5 and 10 gram along with a 20 gram bullion. From MMTC outlets, initially 15,000 coins of 5 gm, 20,000 coins of 10 gm and 3,750 of bullions of 20gm will be available initially.

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