Gold Monetization Schemes: Various Constraints

By | November 18, 2015

Gold Monetization Schemes: Various Constraints

Gold Monetization

India is the 9th largest economy in the world and 3rd largest in terms of PPP. India is one of the largest importers of gold in the world, which is the 2nd biggest contributor to our import bill after petroleum. According to government estimates, Indian families, investors, temples and other institutions hold nearly 20,000 tonnes of gold, one of the largest reserves in the world. But, a lot of this gold is lying idle and is of no use to the economy.

The government of India launched 3 schemes aimed at reducing the import bill on gold and quench the Indian appetite for the yellow metal by sourcing it from within the boundaries. The Gold Monetization Scheme, Sovereign Gold Bonds and the Indian Gold Coin scheme, all are aimed towards the same objective. The personal interest of and promotion by the Prime Minister has definitely provided a head start to the schemes.

The Gold Monetization scheme looks promising (provides 2.5% annual interest) as compared to the earlier similar schemes which provided a very low interest rate, even lower than 1% per annum. For various reasons, India’s earlier ambitious Gold Monetization schemes did not turn out to be a success. These hurdles do pose a similar threat on the achievement of objectives of the current schemes. Some of these hurdles are:

  • Purity of gold is measured by assaying. India has BIS for this task, which has assaying machines in only major cities. There is a serious capacity deficit to certify the purity of gold which can be accepted by banks
  • In India, gold is majorly held in jewelry, which is very difficult to monetize. Jewelry is the manifestation of an artistic work, which would have to be converted into a bar. Monetization of jewelry would make the customer deal with making charges, which is nearly 10-15% of the total value of gold.
  • The government has increased interest rates to keep imports of gold at bay. However, the increased interest rates may channelize more gold imports into the country, by making them a favorable investment as they are attracting heavy interest rates.
  • Gold is not as fungible as cash. Banks might find it difficult to liquefy the gold they take in lieu of cash from depositors. This may strap banks of liquidity.
  • Gold has been one of the major sources of holding black money in the country. In the absence of effective KYC norms, these schemes can act as sources of converting black money into white
  • The government outreach to the rural areas, one of the major gold holders, has been limited traditionally.

Hence, the mere announcement of schemes cannot ensure their success. Though a alcove step, but  in order to bring down gold imports and use the idle gold in the country’s economic development, the government needs to remove all these hurdles and ensure a conducive environment for people to deposit gold. Gold Monetization schemes are an initial nascent steps, an enabling environment is also required to support the schemes.

To know more about gold monetization schemes, read here:

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