The government has launched, amidst plenty of fanfare, three new schemes to monetise gold in the country — the gold monetisation scheme, the sovereign gold bond and gold coin. The underlying objectives of all three are laudable. Households in India hold a large amount of their savings as physical assets — gold, silver and other precious metals and real estate. Gold especially has for long held a tremendous attraction both as an investment avenue as well as a store of value.

With very little of the precious metal now being mined in the country, the seemingly insatiable domestic demand is being met by gold imports. Hence a two-pronged strategy is needed to provide an instrument that would target would-be gold investors and second, to draw out gold lying idle in private hands.

Get the gold to banks

The idea behind gold monetisation is to lure gold, now held as physical assets in private hands, into productive financial savings. According to government statistics, the amount of gold with households is a mind boggling 20,000 tonnes. Even if 5 per cent can be mopped up through innovative financial instruments based on gold, the domestic demand — estimated at between 850 and 900 tonnes annually — can be met. A significant gain would, therefore, accrue to the macro-economy where gold imports, along with petroleum imports, have for long been a significant factor behind the current account deficit.

It is a different matter that with falling oil prices and consequently the reduced import bill, the current account deficit looks eminently manageable. But long term solutions are needed for gold. Those who cling to gold should be weaned away for which they need to be provided with a decent return and equally importantly a guarantee for the safety of their investment.

The gold monetisation scheme (GMS) appears to be central to the three schemes. It is a vast improvement over existing schemes in its genre and its appeal to medium and long term investors should be stronger. Under the new scheme, as small as 30 gms of gold can be accepted. The tenure can go up to 15 years and the scheme pays higher interest rates to depositors – 2.25 to 2.5 against one per cent before.

A synthetic bond?

The gold bond scheme is for those investors who buy gold as an investment. According to government estimates, a third of the domestic gold demand arises from those who buy gold bars and coins. The gold bond’s unique feature is that it will offer returns linked to market price of gold. This is akin to a synthetic bond mimicking gold prices.

Gold coins to be issued with Ashoka Chakra emblem is bound to be popular. It is hoped that the government would mop up enough gold through its monetisation scheme to meet the demand from jewellers as well as from the issuance of coins.

Compared to the draft guidelines , the new guidelines for all the three schemes have been spruced up operationally and are friendlier to investors. Yet, niggling questions remain.

The gold monetisation scheme is no doubt an improvement over the earlier scheme — it promises higher interest rate and retains the promise of returning the deposit as gold subject to certain conditions.

However, gold held as jewellery will be very difficult to be monetised. The point has been made several times before that there would be a sentimental objection to parting with jewellery, which in many households are passed on from one generation to another. In fact, no gold monetisation scheme can overcome the inhibitions of all would-be investors. People buy gold with different motivations. Pledging gold to meet seasonal requirements is very common. Many gold loan companies have grown exponentially recently, especially in Kerala. Whether the loan is taken from an NBFC or a money lender, the gold pledged can be redeemed in its original form and not melted away at the instance of a bank.

Despite much greater clarity in the operational aspects, it is obvious that the infrastructure for operationising a monetising scheme should be built up in a way that promotes efficiency as well as transparency.

There are high hopes that temples and other religious institutions who are large repositories of gold will invest in the monetisation scheme. The move will be controversial. There will always be a suspicion that politicians will get into the act. Moreover, religious traditions built up over centuries might have to reinterpreted in some cases. A better alternative to persuade the temples to convert a portion of their gold stock into coins, pendants and so on bearing the stamp of the presiding deity. This has already been tried out but from the point of bringing gold into mainstream financial sector has little relevance. One hopes that these schemes should succeed for the sake of the macro-economy. With the Prime Minister himself taking the initiative to popularise the schemes, they should make some headway. Fresh ideas are always welcome to remove possible glitches and make the schemes even more appealing.

crl.thehindu@gmail.com

(This article first appeared in The Hindu dated November 16, 2015)

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