Gold Schemes in India – Explained

Background

In 2015 , the Indian Government came up with three new gold schemes. The combined purposes of these schemes are to reduce India’s gold imports and to inject all the idle gold from Indian homes into the Indian economy.

Introduction 

India is among the top three largest importers of Gold in the world. Gold is one of the main reasons behind our tilted CAD – current account deficit. Indians purchase gold either for consumption or as a capital good – for insurance against future uncertainties or a hedge against currency fluctuations and inflation. The Govt. has been raising the import duty but it still has not been able to curb our whopping gold imports. In order to reduce gold imports and mobilise the money stuck in the form of gold and inject it into the economy, the Govt. has come up with 3 schemes. They are discussed in brief below.

Gold Monetisation Scheme

This scheme aims to draw the gold lying idle with people into the monetary system. Individuals can deposit their gold in authorised banks and receive interest on it. On maturity, the individual gets cash equivalent to the value of gold at the time of maturity plus interest.

Pros:-

1. Extra source of income for people in the form of interest earned on idle gold
2. Banks can lend or sell this gold to jewellers who are the major importers of gold thereby bringing down gold imports
3. Reduce CAD by bringing down imports
4. Good way to unlock black money parked in the form of gold
5. Will turn gold into productive asset
6. Increase supply of gold through banks, thus, bringing down price of gold
7. Increase in forex reserves

Cons:-

1. Even if gold deposited in jewellery form, after maturity it will be returned in cash equivalent or gold bars and not in jewellery form
2. Instead of encouraging individuals to deposit the gold they already have, it might encourage cunning entities to import large amounts of gold and deposit them with Indian banks to earn high interest
3. Banks might not be able to match gold borrowers with gold depositors as people are not used to borrowing gold. Hence, banks may not be able to accrue enough interest in order to pay interest to the gold depositor
4. Gold in an integral part of our culture and we might prefer stocking up gold jewellery in our homes like we are used to rather than deposit them in banks as an investment.

Sovereign Gold Bond Scheme

These are certificates issued by govt on payment of a specified amount of money declaring that an individual has bought a certain amount of gold and on maturity this individual will get the market value of the gold plus interest.

RBI issues these bonds on the strength of its gold reserves. These bonds pay an interest similar to international rates of borrowing gold. Only resident Indians can buy such bonds.

Instead of buying physical gold and stocking it up for a future event like wedding, one can buy this bond and upon maturity can get the gold along with interest.

Pros:-

1. These bonds are issued on behalf of govt of India and hence, will have a sovereign guarantee
2. It can be used as collateral against loans
3. It can be traded on commodity exchanges
4. It will relieve investors of the need to check quality of gold which is a major hurdle when purchasing gold from local jewellers
5. It provides an alternative to physical gold
6. It would reduce demand for physical gold as people who buy gold bars and coins for investment will buy this bond instead
7. Reduced demand will reduce prices of gold
8. Imports will also fall leading to favourable CAD

Cons:-

1. Rural population with no knowledge of banks and bonds may prefer buying physical gold than bonds
2. If Government gives good interest on these bonds, jewellery sector might suffer
3. Lack of liquidity as proposed tenor of bond is 5-7 years and only option to exit bond before maturity is to trade it in commodity exchange

India Gold Coins Scheme

Government will sell Indian gold coins with Ashok Chakra and it will be of highest purity. This may help reduce the demand for coins minted outside India and also help in recycle the gold available in the country.

Conclusion

These schemes supplement each other. By the monetisation scheme, private gold becomes available with banks for sale as Indian gold coins or to be lent to other banks for the bond scheme.

As the bond scheme promises gold at a fixed date in the future, the buyers of gold need not buy gold today and stock it for a future event like wedding. This will dent the current demand and import of gold.

Since India is among the largest importer of gold, if our imports fall, it will make international gold prices fall too.

This is not the first time such schemes have been floated. Previous attempts to mobilise gold from houses into economy have not succeeded. Mainly because it was not profitable for the banks and neither too convenient for the people. Besides we Indians are too attached to our gold so we need higher incentives to part with it.

These schemes if successful will curb our gold imports and turn idle gold stuck in homes into productive assets and investments. These schemes put together have the potential to change the gold habits of the Indian people