Gold Monetization Schemes and Benefits

By | November 24, 2015

The Government of India has launched Gold Monetization Schemes to liquidate the reserves of gold lying idle in Indian homes, so that its import bills could come down significantly.

Gold Monetization Schemes

Facts:

  • India is one of the largest consumers of gold in the world importing nearly 1,000 tons of yellow metal every year
  • According to conservative estimates, India has nearly 25,000 tons of gold amounting to nearly ₹63 lakh crore accounting for 56% of the GDP or 67% of the total money supply in India.
  • According to anecdotal evidences, the amount can be up to three times the above mentioned.
  • Major gold mining nations are Australia, Brazil, Canada, Chile, China, Ghana etc.
  • Gold estimated to be above the ground is nearly 1,77,000 tons, out of which 32,000 is with the world central banks. India has more than 25,000 tons gold with the RBI having 558 tons of yellow metal.
  • India has launched various Gold Monetization Schemes to use the humongous gold reserves stashed in Indian homes. These earlier Gold Monetization Schemes have met with negligible success.
Government announced these Gold Monetization Schemes 
  1. Gold monetisation scheme: This scheme would replace the existing gold deposit and gold metal loan schemes. GMS would allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal account.
    • Issues regarding the scheme
      • In India, the gold and jewellery market is highly fragmented and unorganised and nearly 96% is family owned business
      • This scheme would require time and infrastructure to implement. A secure and safe supply chain mechanism would have to be developed to store and deliver gold end to end
      • There needs to be a non destructive testing for ascertaining the purity of gold by assaying. There are X Ray fluorescence handheld devices and desktop analysers to assay gold, which is very accurate but requires capital investments.
      • To help the monetisation of gold and develop the market, hallmarking of gold and gold jewellery is necessary. The certification by London Bullion Market Association is the most respected world wide.
      • In India, the BIS, with its headquarters in New Delhi, has been hallmarking gold since 2000 through its 221 centres to provide third party assurances to customers on purity and fineness of gold.
      • Initially, the GMS should start with gold bullion which includes gold bars and coins for investment purposes and are generally hallmarked. This accounts for nearly 45% of gold.
      • Assaying arrangements need to be ramped up and reliable and cost efficient assaying machines must be provided to every city and town.
    • This scheme involves customers to open Gold Savings Accounts in banks and earn a tax free interest on their deposits.
    • They can get the metal valued from a BIS-approved hallmarking center.
    • The central government is also mooting to allow banks to deposit this yellow metal as a compulsory requirement of CRR and SLR with the RBI.
    • The banks would have to put in special efforts to reach out to temple trusts, who are major holders of gold, to liquefy their assets
  2. Sovereign gold bonds: It would act as an alternate financial asset, as a substitute to purchasing metal gold. SGBs will carry a fixed rate of interest and will be redeemable in cash in terms of the face value of gold, at the time of redemption by holder of the bond.
    • Issues
      • These are the easiest to implement among all the schemes announced.
      • These can be made available from banks, post offices because of their extensive rural networks.
      • GSBs can wean away the annual demand of 300 tons from physical holding of gold in bars and coins and thereby reduce pressure on imports.
      • The GSBs need not procure and store gold for backup against the bonds, because a perpetual annual scheme with buyers and sellers in the market could be introduced despite a stipulated maturity of these bonds
      • There would be a need to make these bonds tradable on stock exchanges to make them attractive. They should even be made redeemable at post offices and banks.
  3. Indian gold coin: With Ashok Chakra embedded upon an indigenously made gold coin, an IGC would help reduce the demand for coins minted outside India and also help to recycle the gold available within the country.
Benefits of these Gold Monetization Schemes
  • It would reduce the pressure on imports as gold makes a major chunk of it. It would further help bring down the CAD.
  • The minting of gold coins in India, mainly used for investment purposes, would lead to higher employment and retention of related profits within the country.
  • The prevalence of gold holding is widespread in India and includes even those under the poverty lines and involving them through Jan Dhan Yojana can contribute to financial inclusion and provide them with loans at better terms than they get from local money lenders.
  • A success of these Gold Monetization Schemes could bring down the amount of unaccounted money by bringing it into the formal financial circle.
  • Monetising of gold would help in unlocking high volume of dormant money, that would boost the economy by providing purchasing power to the households and much needed liquidity to micro enterprises.

 

To know about various constraints in implementation of these gold monetization schemes, read here

http://infervour.com/gold-monetization-schemes-various-constraints-in-their-implementation/

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