The gold monetisation policy of the government, aimed at putting idle gold into productive use, may see limited success given the emotional attachment Indians have to the yellow metal, analysts say. While the government’s latest scheme will help gold owners earn interest on their idle gold holdings, its success will depend to an extent on the interest rate offered by banks, said Karthik Srinivasan, Senior Vice-President, Financial Sector Ratings, ICRA Ltd.
“We believe that mostly gold held in non-jewellery form would be utilised in the gold monetisation scheme as people are generally emotionally attached to jewellery,” Mr. Srinivasan added. The Cabinet gave its approval for the gold bond and gold monetisation schemes to reduce the consumption and demand for gold in the physical form.
About 1,000 tonnes of gold are imported annually. The Union Budget 2015-16 had proposed to introduce a Sovereign Gold Bond Scheme and develop it as a financial asset, an alternative to gold in the physical form.
“One of the main reasons Indians buy gold is its utility as a hedge against price movements in other financial assets,” said Rudra Sensarma, Associate Professor of Economics, Indian Institute of Management, Kozhikode.
The other important motive is consumption, which means to wear as jewellery, give as a gift, or for religious reasons. Prof. Sensarma’s research has shown that the investment motive for buying gold in India is stronger than the consumption motive.
Therefore, he said, the gold monetisation scheme and gold bonds will certainly benefit a majority of the gold buyers in India and is likely to channelise the idle gold into productive use. However, the banks would convert the gold into coins or biscuits for the purpose of storage and transfer it into the bullion market.
Among Indians, who buy gold not for investment but for consumption, the demand for holding the yellow metal in physical form will remain strong. For instance, gold in jewellery form may carry emotional value for many Indians and they may be reluctant to deposit this in a bank due to its subsequent conversion into other forms.
“They would not want to earn the one or two per cent returns simply because they would not be getting the gold back in the same form as they deposited in the bank. But those who buy gold purely for investment motive may opt for gold monetisation scheme and gold bonds and will be benefited by it,” said Prof. Sensarma.
The government and banks will have to make special efforts to reach out to temple trusts and convince them to view their gold assets as investment holdings, he added.
There is apparently a lot of idle gold in rural India which would require special efforts to gather. Furthermore, the RBI will be faced with the challenge of customising know your customer (KYC) requirements for those who opt for gold monetisation schemes.
Overall, the scheme is expected to benefit the Indian economy by bringing down the current account deficit and encouraging some people to treat gold as investment rather than a luxury item which will bring them financial returns.
* This article has been corrected for a factual error
