Issues Around Gold Monetization Scheme

On the basis of a report prepared by researchers at IIM, Ahmedabad, few newspapers have published progress of the Gold Monetization Scheme, since it was introduced by Prime Minister Narendra Modi on 5^th November, 2015. The scheme, launched to replace the old Gold Monetization Scheme, 1999, has not done well on almost all parameters. In this article, we review its design, efficacies and drawbacks.

Design Of The Scheme- How Does It Work?

Certain important criteria for the working of the GMS are discussed below:

Eligibility of Banks

All the Schedules Commercial Banks except the Regional Rural Banks are eligible to implement the Scheme. These banks are free to frame their own schemes in terms of minimum lock-in period, rate of interest etc., but the same has to be verified by RBI.

Term of Acceptance of Gold

There are three terms for which the banks may accept the gold:

• Short term Bank Deposit– Under this the designated banks can accept gold for a period of 1 to 3 years. The principal and interest on this shall be denominated in gold; or
• Medium term Government Deposit-The designated banks can accept gold for 5 to 7 years. The principal and interest shall be calculated in Indian rupees with reference to the value of gold; or
• Long term Government Deposit– The designated bank can accept gold for a period of 12 to 15 years. The principal and interest here also shall be calculated in Indian rupees with reference to the value of gold.

Eligibility of the Depositor of the Scheme

This Scheme is open only for the Resident Indians who can be any of the following:

• Individual owners of gold
• Trusts- including Mutual Funds or Exchange Traded Funds registered under the SEBI (Mutual Fund) Regulations

The depositors are required to comply with the rules of customer identification applicable for opening any deposit account, for the purpose of opening an account under the Gold Monetization Scheme.

Eligibility for Gold

• All deposits for this scheme are to be made at the Collection and Purity Centre. These centres are to be certified by the Bureau of Indian Standards and notified by the Central Government for the purpose of handling gold deposited and redeemed under the Scheme.
• The CTPC is required to test the gold in order to ensure that it is of the standard 995 fineness. It shall issue a receipt signed by the authorized signatories of the Centre, indicating this.

Need For A Gold Monetization Scheme

The Gold Monetization Scheme aims to bring the gold that is lying idle with individuals in their bank lockers in circulation in the economy. This scheme has benefits for both owners of gold and the banks collecting the gold.

Benefits for Depositors

• Low Investments– The best part of this Scheme is that one can start an investment with as low as 30 grams of gold. Along with this, it also offers a considerable degree of flexibility to the depositors to withdraw their investment whenever they need it or are not comfortable with the working of the scheme. However, one needs to comply with a minimum lock-in period before withdrawal, which is also very less.
• Reduction of carrying cost– As per the current norms of storing gold with banks, the owners are required to pay locker charges for the storage of their gold safely with the bank. But as per this Scheme, an individual is not required to pay any locker charges on its deposit.
• Earning interest– As per the current scenario, the gold that lies in the locker remains idle irrespective of the appreciation in its value. But as per this Scheme, an individual storing gold with the bank will also receive a regular interest or dividend. The amount to be paid by way of interest shall depend on the weight of gold along with the appreciation of the metal value in the market. The customers also have the option to decide at the time of deposit as to whether they would want their return in terms of gold (equivalent to 995 fineness gold) or Indian rupees.
• Exemption from certain taxes– The earnings from this gold is also exempted from capital gains tax, wealth tax and income tax.

Benefits for banks and economy-

• The banks can also earn by selling the gold or lending the gold accepted under short-term deposit, either to MMTC for minting India Gold coins or to jewelers. It may even sell it to other designated participating banks under the scheme.
• It will substantially reduce the loss of foreign currency on importing gold.

Gold Deposit- Why Has It Been So Low?

It has been pointed out that the main reason for a lack of interest from the key target groups is the lack of sufficient incentives for banks, individuals and refiners. Some of the key issues identified with the Scheme are:

Generalized scheme

As per the study made, every group of consumers of gold has a different need in terms of incentive. In other words, a one-size-fits-all policy has not appealed equally to all classes of consumers. There are some who are more willing to part with gold for investment purpose and some who are comparatively less willing. Thus, a targeted communication in terms of differential incentives is highly lacking. For example, the residents of Gujarat are comparatively more reluctant to invest in gold bond or other gold monetization schemes, but they are one of the biggest consumers of gold in India. So, in order to attract that large chunk of gold into the economy, one needs to provide greater incentives for them than the other sections of the Indian population. But this step has not been taken.

Lack of awareness

One of the major reasons for the failure of the Scheme is lack of awareness among the Indian consumers of gold. This result has been obtained after interviewing around 1171 households across India, belonging to various income groups. There have been interviews of top executives of 6 banks, 5 refiners and an industrial consultant also. This indicates that not enough steps have been taken by the government in spreading awareness of the merits of this new scheme.

Reluctance to part with gold

Other than the question of incentives, one can find a general reluctance to part with gold as a part of Indian culture. In villages, people have a general reluctance to part with gold for investment purpose. However, 74% of the rural consumers are willing to pledge their gold for collateral purpose. This indicates that they can only let go of gold for liquidity use only in case of basic requirement. There is an existence of a superstitious belief that gold must not be parted with, especially for such a long period. The statistics also show that a considerable section of gold buyers have other conceptions of holding gold which does not permit them to invest gold for a long term.

Conclusion

From the above analysis, it is clear that the Scheme, although a necessity for the economy, has not been able to achieve its goals due to the failure to address the problems of the Indian population. So, there is a serious need to first address the issues with relation to Indian culture which stops a huge part of the population to participate in the Scheme. One way can be to lure them through incentives, but a more important means will be to educate them to come out of the superstitions and think in terms of economic reality. Seeing the slopping of the Indian economy, the proper implementation of this Scheme is an essential step forward. If it is neglected, a decided loss will be caused to the economy.