Will the new gold monetisation scheme glitter?

The crux of the matter is that gold, which the scheme hopes to draw in, is not often stored as bars or coins — forms that lend themselves easily to be valued as a financial instrument. In India, gold is held by households in the form of jewellery.

Updated - November 16, 2021 04:59 pm IST

Published - June 07, 2015 11:15 pm IST

The Finance Minister had spoken about it in the budget. The Finance Ministry published draft guidelines during the third week of May of a new gold monetisation scheme, which it proposes to implement after incorporating feedback from different sections.

The idea to monetise gold is by no means new. In fact, various schemes to tap the gold hoard already exist. Though launched with a lot of fanfare, they have garnered very little subscription.

On economic as well as practical grounds, there has been a continuing need for a scheme, which would basically seek to lure gold now lying idle in households, religious institutions and so on and convert them into financial assets. The objective has been to remove the disincentives that have bedevilled earlier schemes.

The bait offered is interest plus the promise that those who deposit gold now can take it back as gold. The interest rate offered on similar schemes so far has been nominal, and this might have been a deterrent to many prospective depositors. In the latest scheme, there is a promise of tax exemption on top of higher interest rates. If implemented, that would enhance the attractiveness of the scheme but — for many other reasons — will hardly be a clincher.

Even more problematic is the sales pitch based on ‘gold in gold out’, meaning you can take back your initial investment in the same form, namely as gold. This is deceptive even though the government is not distorting facts.

However, much the government assures them that the gold value will be protected and that even the interest will be paid in gold, there is bound to be a resistance from many households. This is because gold in the jewellery will be melted down (after removing the sludge in the form of bars.

Standardisation with respect to the gold that is melted is a must. That runs into difficulties straight away. People buy jewellery mostly for consumption, and may be as a hedge against inflation. It is not uncommon to pass on jewellery from one generation to the next. Family heirlooms can hardly be enticed by a gold mobilisation scheme.

Difficulties galore On the opposite side, in times of distress, the habit among large sections is to take a gold loan or pledge jewels. These might be disadvantageous, the rate of interest charged in the unorganised sector might be usurious but the gold ornament remains in tact.

For banks, gold loans have been among major activities in some States. Agricultural gold loans have been well recognised in states such as Andhra Pradesh supplementing off-season lower incomes from the farm sector. Of course, some non-banking financial companies (NBFCs), especially from Kerala, have built up huge businesses over gold loans.

The draft guidelines have laid down several steps that will have to be taken — as many as six — before a gold deposit account is set up. These include taking the gold jewellery to approved centres for melting them and getting the gold content certified (as to purity etc). Needless to add, the number of such centres will have to up exponentially and their integrity should be beyond question. But, even with the government’s best intentions, the new scheme might flounder over these practical but necessary steps.

There is hope that the scheme will be infinitely more successful with regard to gold held by temples and other religious institutions. One, however, tends to disagree. Depositing accumulated gold with a bank and earning interest is a laudable move but is likely to be very controversial. There will always be a suspicion that politicians will get into the act. Moreover, religious traditions built up over centuries might have to be reinterpreted to suit modern day banking.

A better alternative would be to persuade rich temples to convert a portion of their gold stock into coins, pendants and so on bearing the stamp of the deity. This has already been tried out but from the point of view of bringing gold into mainstream financial sector will have very little relevance.

For the macro-economy, any scheme that would help in moderating the import of the precious metal is welcome. Gold imports rank just behind petroleum imports in the country’s import bill. One has to keep coming with fresh ideas.

One last point: The new scheme will be an improvement over existing schemes — it encourages deposits of very small amounts (35 gram). It guarantees return of principal and interest in gold. Yet, it is incomplete in one way. For the gold market to enlarge, banks should not only receive but also sell gold in a two-way process involving bid and offer. Simultaneously, efforts must be made to link ordinary bank accounts such as savings bank account and recurring deposit to gold.

True `financialisation’ is a two-way process. Among its many advantages, it can demystify gold. If it can be bought and sold over-the- counter and that too even in small denominations, its aura will diminish over time.


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