Should we Invest in Gold Monetisation Scheme(GMS)?.

Dr Sankar Thappa

 In India Gold has a specific place in the society. Gold is not considered simply as an ornament only but it is considered as a symbol of purchase on religious/cultural occasion, love, affection, respect, sentiments etc. Indian people are emotionally attached to gold and also consider it traditionally as a safe investment option making it the mostly demanded product in India.   But India does not have its own Gold mines or reserves to meet the demand for gold. The total consumer demand for gold in India in 2014 was ~843 tonnes(approx 26%) as against the world’s total consumer demand of ~3,217 tonnes, making India the largest demand center in the world surpassing China. 80-90 % of the requirement is covered by import. Import of gold in large quantity  is the main reason for India’s Current Account Deficit(CAD).  In FY13,CAD increased to US$ 87.8 billion (4.7% of the GDP). According to the Ministry of Finance in its Annual Budget 2015 there is over 20,000 tonnes (worth over Rs.60 lakh crores) of domestic holding of gold, lying as an ‘unproductive asset’ which is neither traded nor monetised. In this context, an idea that has gained to monetize the gold lying idle with the households and other entities within India and make it available for re-use. To deal with the  CAD and  large stock of unutilized gold, On 9th September, 2015, the Government of India gave its approval for the introduction of the Gold Monetization Schemes (GMS).

Monetization of Gold

In general monetization refers to a process of converting a commodity into domestic currency. Gold Monetization refers to conversion of the value of gold into rupee. Gold Monetization Scheme refers to a process wherein a depositor deposits gold (jewellery, coin, etc.) with a bank which is then lent by the bank to its borrowers (say jewellery makers), after melting into gold bars. This is similar to a savings bank account, but carried out in terms of gold instead of in rupee. 

Mechanism of Gold Monetisation Scheme(GMS):

We   can go to a bank (e.g. SBI) and deposit our physical gold in the Metal Account(Gold Savings Account). Banks will assess the purity and value of our gold. Then Bank will credit our metal account with points. These points represent the value of our physical gold. We will get fixed interest rate somewhere between 2-3% on deposits but in gold unit. The term of deposit can be made for a short-term period of 1-3 years ; a medium-term period of 5-7 years and a long-term period, of 12-15 years . At the time of redemption we can take back either in gold or cash. But the option should be decided at the time of deposit and once decided cannot changed. Minimum quantity required for the scheme is 30gms.

The banks accepting such deposits may sell or lend the gold accepted under short term tenure to Metals and Minerals Trading Corporation of India (MMTC) for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS. The gold deposited under medium and long term tenure will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds are credited to the Central Government’s account with the Reserve Bank.

Benefits of GMS:

Governments:

·        GMS will help in mobilizing the large amount of gold lying idle with households, trusts and various institutions in India and benefit the Indian gems and jewellery sector which is a major contributor to India's exports. In fiscal year 2014-15, gems and jewellery constituted 12 per cent of India's total exports.

·        The mobilized gold will also supplement RBI’s gold reserves.

·        It will help in reducing the Government’s cost of borrowing.

·        It will reduce the country's dependence on the import of gold.

Banks:

GMS will be another source of income for the bank. The bank will be free to set the rate of interest according to them. As the bank could be able to make the gold coins and sell to the public or they could give to the jewelers and earn the high rate of interest.

Industry:

GMS will help to reduce the import of gold as it will mobilize the idle gold lying with citizens and bring them in circulation. Gold collected by banks will be made available to jewellers as raw material in the form of loan. This will reduce import of gold by jewelers resulting lowering the  current account deficit.

Depositor/Investor:

1.      GMS will be another investment option for individuals. They can assess the purity of the gold that they purchased and of the gold that has been passed to them generation after generation.

2.      The GMS earns interest for the jewellery lying in lockers/household/temple etc. Broken jewellery or jewellery out of fashion can earn interest in gold. Coins and bars can earn interest apart from the appreciation of value

3.      Gold will be securely maintained by the bank.

4.      Redemption is possible in physical gold or rupees, hence giving further earning opportunity.

5.      Individuals can get loan against the scheme they own as per RBI regulations.

6.      Investors can be protected against volatility in gold prices if they have invested in the scheme.

7.      Earnings are exempt from capital gains tax, wealth tax and income tax. There will be no capital gains tax on the appreciation in the value of gold deposited, or on the interest earned on it.

Challenges :

1.      People might not want to melt jewellery because of high emotional attachment to their jewellery  as all jewellery to be deposited has to be tested and melted. The recasting of the gold jewellery significantly decrease the value of the ornament resulting low deposit of jewellery.

2.      Lack of expertise in assessing purity of gold will compel banks to use the services from the purity verification centre. This may increase the transaction cost.

3.    Storage and transportation of gold might be a challenge for the banks. It might increase the handling cost.

4.      Fulfilling the KYC(know your customer) norms will be a big challenge for the people. Many of the people may not have bills on purchase of gold. People might hesitate in depositing gold under GMS.

5.       If gold price rises a lot, many people might want to redeem the investment leading to

burden of repayment on the banks.

6.    People may not be interested deposit gold for long term because of price risk involved.

The success of the scheme would depend on the degree of people are convinced. The Government and the banks have to put a great effort together to convince the people to make the GMS successful.