“Observing that there is no reason for the country, which has 20,000 tonnes of gold lying idle with households and institutions, to remain poor, with some efforts and right policies India can get rid of this tag of poor nation.”
PM Narendra Modi on Gold Monetization Scheme
India is the largest importer of gold comprising 20% of world imports. Around 700-900 tonnes of gold is imported every year by India. This accounts for a significant portion of physical demand. In India gold is consumed for two purposes:
- For making jewelry
- Holding gold by investors as a capital good for a variety of reasons such as a store of value, a hedge against inflation and currency fluctuations, as an insurance against uncertainty and tail risks
This idle gold is profitable neither to the economy nor to the individual. Instead the consumer incurs a carrying cost in the form of bank locker where he is charged for storing the gold. So in order to mobilize the gold which is lying idle with the households and institutions in the country, Government came up with a scheme of Gold Monetization Scheme which gives fixed returns. The returns are given as fixed interest to the person for the gold deposited by him in the Gold Savings Account. The gold which is deposited is accepted in any physical form – jewelry, coins or bars. The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself (that is, at the time of making the deposit). The minimum quantity of gold that a customer can bring is proposed to be set at 30 grams which encourages even small depositors.
The objectives of the Gold Monetization scheme are:
- To mobilize the gold held by households and institutions in the country.
- To provide a fillip to the gems and jewelry sector in the country by making gold available as raw material on loan from the banks.
- To be able to reduce reliance on import of gold over time to meet the domestic demand.
Gold Mobilization Operation: This is the front end operation which explains the procedure of how customer opens a Gold Saving Account and deposits gold.
- Initially the gold which is ought to be deposited is taken to hallmark centers which are currently 350 in number to conduct a preliminary XRF machine test to know the amount of pure gold
- Once the result is obtained the customer will decide whether to deposit or not
- After taking the consent of the customer the gold deposited is melted in fire assay centers removing the impurities
- The final gold which is obtained in the form of bars is weighed and once again the consent of the customer is taken for depositing the resultant gold
- If the customer is not willing to deposit, he is free to take back his gold after paying certain nominal fee to the center
- Otherwise a certificate is given by the collection center certifying the amount and purity of the deposited gold
- Finally a customer fills a KYC form and deposits the gold in the Gold Savings Account
- The tenure of the deposit will be minimum 1 year and with a roll out in multiples of one year. Like a fixed deposit, breaking of lock in period will be allowed.
Gold Lending Operation: The deposited gold is utilized in various ways by the banks to achieve its objectives along with earning the fixed returns that should be given to the depositors
- Banks will enter into a tripartite (three party) MoU with refiners and purity testing centers that are selected by them to be their partners in the scheme
- This MoU consists details regarding payment of fee, services to be provided, standards of service and the details of the arrangements between the banks, refiners and purity testing centers
- The deposited gold is sent to refineries for storing in warehouse unless banks prefer to hold themselves
- Banks can deposit this gold as a part of their CRR/SLR with RBI
- Banks can generate foreign currency by selling this gold in foreign countries which improves BoP of the country
- Bank may convert mobilized gold into coins for onward sale to their customers or to buy and sell on domestic commodity exchanges, where mobilized gold can be delivered
- Jewelers can take gold as a loan from banks through Gold Loan Account, and the bank will earn interest on these loans and Jewelers will repay the loan in cash
Benefits to the Economy
GMS implementation will have multiple benefits for the Indian economy. It will increase supply of gold in the economy, which avoids the need for importing the gold. This in turn reduces the Current Account Deficit (CAD). Currently small jewelers are buying gold from large jewelers. GMS will facilitate the availability of gold through banks on the loan curbing Monopoly. Moreover as GMS makes gold available to jeweler on loan from bank, this will result in stability in gold prices.
Benefits to the Customer
After GMS implementation the customer will get affixed returns on the gold he deposited along with the appreciation of the value without any risk factor. Gold will be maintained safely by the bank. There will be further earning opportunity as the redemption is possible in physical gold or rupees. After due examination the customers of GMS will get tax exemptions from Capital Gains Tax, Wealth tax and Income Tax on the earnings as well as on the value appreciation for the gold deposited.
Challenges Faced By the Government
Although GMS was beneficial to the Economy as well as holders of Gold. It involves certain challenges to overcome for a successful implantation. The process of depositing the Gold takes around 10 hours of time which is very tedious. Consumers have to go to hallmarking centers before depositing, which they are not familiar with, or which are not easily accessible. there is a lack of awareness about GMS which has resulted in a skepticism about the scheme in customers. Customers are also worried at queries on the source of the jewelry. The Government needs to address these queries and instill faith in the mind of the consumers.
The Road Ahead
The Government is taking measures to overcome the barriers in order to make headwinds. Indian Bullion and Jewelers Association have made a proposal to tie up with member jeweler network which make hallmarking centers easily accessible to the customers. Family jewelers can act as agents to create awareness about this scheme in the people. Following a policy of quoting PAN number for buying jewelers above Rs 2 Lakhs which curbs the usage of unaccounted money to buy gold. The initiative if implemented well can be the one to watch out for as it would not only benefit the owners of gold but, can help the Indian economy as well in a big way.
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