Will Gold Monetization be Successful in India?

The Indian government recently has set its eyes on digging out the huge amount of gold lying idle in storage of people here by declaring Gold Monetization Scheme (GMS). The gold loving Indian people are said to have stored about 24,000 tons of gold in their safe. We have discussed the GMS here recently but certain section of the industry here are skeptical about success of the scheme.

The government’s aim is to create a win-win situation for all the concerned parties, wherein the common people would earn dividend on gold deposits, while the country’s dependence on gold-imports would be eased as the household stocks may find its way in to the domestic supply. On merits of this scheme, the unproductive asset for the households becomes productive along with the perennial predicament of the widening Current Account Deficit (CAD) becomes less challenging for the government.

GMS also tries to encourage banks by allowing them to utilize gold deposits as part of their CRR/SLR requirements. However, there is no complete clarity on this measure. If implemented, this provision can help banks make fruitful use of their cash reserves, which otherwise remains unutilized with the Reserve Bank of India (RBI). Banks can earn good profits by selling refined gold from the deposits to the jewellery industry and also improve the supply of the yellow metal in the Indian markets. Easy availability would restrain the physical premiums and in the process ensure the regular supply to the jewellery fraternity.

Although the (GMS) initiative is widely welcomed by the industry circles here as a noble one but they feel that lack of proper infrastructure along with some other factors may prove to be challenges to success of the scheme.

The first challenge is setting up the infrastructure to implement the scheme. According to the draft, the GMS requires “a vast infrastructure for facilitating easy and secure handling of gold.” The other issue is the rate of interest. The draft notes that the banks will have the power to decide what interest rates it wants to offer. A low rate though may not impress significant number of households to deposit their gold especially as they would be losing certain amount of money. The deposited gold jewellery would be melted. The depositors have the option to convert the jewellery in cash or in gold. If he decides to redeem in gold and once again convert it to jewellery, he would have to spend an additional 10% to 20% for making charges. The depositors would not be compensated for this. If the interest rates are below 3% on the deposits, the GMS may fail to take off.

Besides, traditional families in India are emotional about their gold jewellery. About 90% of the household gold holdings are in jewellery form and the rest is constituted of coins and bars which are mostly unaccounted. The GMS involves losing the original form, which is a big discouraging factor for the individuals to subscribe to such a scheme. But bodies like temples and shrines can opt for monetization considering that retaining the original form may not be a priority.

Although the GMS has provided that there would not be any tax on the gold deposits, the depositors could be asked about the source of the gold holdings. As majority of the family holdings here are inherited and unaccounted, it would be extremely difficult to ascertain the source. The Indian government has already initiated a clampdown on black money and there is a high probability that the income tax authorities would question the depositors on the source of their asset holdings. This can deter participation, as unaccounted deposits would invite big troubles for individuals as well as institutions.

No matter how important the scheme may be, the success of GMS is entirely dependent on the participation of individuals. A similar plan may have worked in a country like Turkey but then the emotional attachment to the jewellery owned is different in India. Unless these probable impediments are considered, it would be difficult to foresee the scheme attaining its noble objectives.