An overview of gold monetisation scheme performance in India

Gold has always been an integral part of the socioeconomic ethos of the Indian household.

• As a commodity, it has always carried with it the tendency of invoking a sense of cultural and sentimental attachment, making its consumption and investment in India very different from that of other countries.

• The consumption of gold has always been greatly intertwined with the Indian household’s financial planning goals. Bought as bullion or as jewellery, for either personal consumption or as investment or as even a gift, gold invariably exists in every household’s financial portfolio.

• Gold as an asset plays a very important role in an investor’s portfolio as it not only provides stability for returns but also gives an opportunity to maximize the wealth of the investor

• Investors generally buy gold as a way of diversifying risk. Price of gold is determined by the market force of demand and supply.

• Central bank keeps some portions of their securities in the form of gold. India has a long and special relationship with gold. From weddings to religious festivals, gold jewellery has a strong cultural relevance and its role in traditional Indian life dates back for centuries.

• However, gold is not just viewed as an adornment.

• For many people, gold is equally viewed as a safe, secure investment; a unique way to preserve their wealth.

• In India, gold has, through generations, remained an obvious and natural choice of saving of all households. Gold has never been an easy product around which policy could be formulated.

• Policies around gold (and to some extent business plans and financial innovations related to gold) have all largely been based on a couple of assumptions;

(a) Demand for gold in India will never wane;

(b) People in India will not part with their gold easily;

(c) Women are sentimentally attached to their jewellery and hence will not part with it;

(d) if given a choice between cash or gold, Indian people will opt for gold.

• At various points of Indian history, one or all of these assumptions have been true.

• Gold makes a valuable contribution to Indian economic growth as well. It is estimated that at least 2.5 million people are employed by the gold industry and, according to consultancy PricewaterhouseCoopers, gold boosts economic output in India by at least $30 billion per annum. Gold also plays a central role in the Indian gems and jewellery export market, one of the fastest growing industries in the country and a leading foreign exchange earner.

• In fiscal year 2013, gems and jewellery constituted 15 per cent of India’s total exports and the value of gold items alone was more than $18 billion. Yet, in some quarters, gold is viewed as an idle asset and a key factor behind the current account deficit.

• Acting on this belief, the previous government implemented policy measures aimed at stemming the flow of official imports of gold.

• However, these measures have had unintended consequences, encouraging smuggling, an activity that was much reduced when the Indian gold market liberalised in the late 1990 In the last few years, gold imports have been rising significantly.

• India accounts for more than a quarter of global gold imports despite being the contributor of less than 2 per cent in the global trade. India is the largest consumers of gold in the world, accounting for around 26% in the year 2015.

• The outflow of foreign currency and increasing the current account deficiency thereby mounting pressure on Reserve Bank of India (RBI) and Govt. of India (GOI).

• Gold lying in the locker appreciates in value if gold price goes up but it doesn't pay you a regular interest or dividend. On the contrary, you incur carrying costs on it (bank locker charges).

• The monetization scheme will allow you to earn some regular interest on your gold and save you carrying costs as well. It is a gold savings account which will earn interest for the gold that you deposit in it. Your gold can be deposited in any physical form – jewellery, coins or bars.

• This gold will then earn interest based on gold weight and also the appreciation of the metal value. You get back your gold in the equivalent of 995 fineness gold or Indian rupees as you desire (the option to be exercised at the time of deposit

• Nearly 18 months after it was first launched, the gold monetization scheme is yet to find many takers. In response to a Lok Sabha question, the government revealed that till mid-February this year, the scheme has led to deposits worth only 6,410 kg of gold since it was launched, less than 2% of the annual imports of the yellow metal in 2016.

What is gold monetisation scheme?

• Launched to curb India’s massive gold imports, which contributes significantly to India’s trade deficit, the scheme allows a bank’s customers to deposit their idle gold holdings for a fixed period of time in return for an interest in the range of 2.25% to 2.50%, and redeem it on maturity either in the form of gold or its rupee-equivalent amount.

Scheme Guidelines

• The scheme is meant to mobilize gold held by domestic households and institutions. Gold collected through the scheme will be made available to jewellers for manufacturing of new jewellery and other items.

• The scheme will initially be launched at a few places because the government will have to first set-up infrastructure for facilitating easy and secure handling of gold.

• Gold collected from consumers will first be cleaned and measured at test centres; it would then be melted to test for purity. After the tests, consumers can either deposit the gold for a fee or take it back after paying a nominal fee.

• The minimum quantity of gold that a customer can bring is proposed to be set at 30 grams.

• Those willing to deposit the gold will be given a certificate mentioning the amount and purity of the deposited gold. Banks will open a 'Gold Savings Account' on the basis of such certificates.

• Consumers will be paid interest on their gold savings account after 30/60 days of account opening. The amount of interest rate to be given is proposed to be left to the banks to decide.

• Both principal and interest will be paid to the depositors of gold, will be 'valued' in gold. For example if a customer deposits 100 gms of gold and gets 1 per cent interest, then, on maturity he has a credit of 101 gms.

• The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself (that is, at the time of making the deposit).

• The tenure of the deposit will be minimum 1 year and in multiples of one year. Like a fixed deposit, breaking of locking period will be allowed.

• Gold savings account will be exempt from capital gains tax, wealth tax and income tax.

Role of Financial Institutions

• The financial institutions play a key role in this scheme to make the yellow metal to uplift the Indian economy.

• Majority of physical gold holding by temples, charitable trusts, individuals etc can be pulled in to the investment platform through this Gold Monetization scheme. The foremost players of this scheme are banks, jewellers and individuals.

The objectives of the Gold Monetization scheme are:

• To mobilize the gold held by households and institutions in the country.

• To provide a boost to the Gems and jewellery industry in the country, which contributes in employment creation, earns foreign exchange through exports.

• To be able to reduce reliance on import of gold over time to meet the domestic demand; in turn reducing the country’s need for foreign exchange reserves.

WORKING PROCEDURE

• STEP 1: Get your jewellery tested at any of the 355 Bureau of Indian Standards (BIS)-certified hallmark centres to find out the amount of gold and purity.

• STEP 2: Ornaments will be cleaned and gemstones (if embedded) returned. Jewellery will then be melted and converted to bars or coins. You take it back or take a certificate.

• STEP 3: Deposit certificate in bank, get gold saving account

• STEP 4: You will now get an interest on amount of gold

• STEP 5: When you wish to retrieve the gold, you can take a certificate mentioning the amount of gold in your account to a jeweller and get the gold in the form of bar.

• There are five stakeholders i.e. customers, jewellers, government, banks/mints, non-banking financial institutions/ Financial Institutions. The customers (households, temples and trusts) will get assured value, proper cartage, transparency in transaction besides the options of having cash/deposit/bonds / coins.

• Jewellers have the benefit of getting gold without import besides assured cartage, appropriate pricing without exchange rate fluctuations and lower inventory.

For a gold mobilization scheme to be successful three important considerations must be kept in focus:

• Valuation: Establishing the purity of the gold in a transparent and efficient manner within a defined time frame is essential.

• Storage and Distribution: Well-developed logistics to prevent fraud, tampering, and enable inventory tracking.

• End-to-end customized enterprise resource planning (ERP) software.

SOVEREIGN GOLD BONDS

• Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold aimed at bringing down gold imports and providing an alternative to physical gold.

• Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bond is issued by the Reserve Bank of India on behalf of the Central Government.

Interest rate

• The bonds bear interest at the rate of 2.75 % (fixed rate) per annum on the amount of initial investment.

• The bonds are issued in denominations of one gram of gold and in multiples thereof.

• Minimum investment in the bond will be two grams with a maximum buying limit of 500 grams per person per fiscal year.

• The RBI has fixed the issue price of first tranche of gold bonds at Rs 2,684 per gram which will be open for subscription from November 5 to 20.

• The price of the bonds will be fixed by the RBI on the basis of the previous week’s (Monday – Friday) simple average price for gold of 999 purity.

• The average price of gold is published by the India Bullion and Jewellers Association.

Protection

• The bond offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated.

• Investors are assured of the market value of gold at the time of maturity.

• Gold bonds are free from issues like making changes and purity in the case of gold in jewellery form.

• Interest on bonds is taxable as per the provisions of Income Tax Act 1961.Here, capital gains tax treatment will be the same as that for physical gold.

• Moreover, these bonds can be used as collateral against loans from banks, financial institutions and NBFC.

• The Loan to Value ratio is the same as applicable to ordinary gold mandated by RBI from time to time.

• So if an investor is looking to invest in gold for medium to long term then this can be preferred option over other alternatives available.

INDIAN GOLD COIN

• The Indian Gold Coin Scheme launched by PM Narendra Modi bearing Ashok Chakra on one side and Mahatma Gandhi image on the other side is the first ever India Gold Coin.

• Initially, the coins will be available in denominations of 5 grams and 10 grams. A 20 gram bar or bullion will also be available.

• About 15,000 coins of 5 gm, 20,000 coins of 10 gm and 3,750 gold bullions will be made available through MMTC outlets.

Features

• The Indian Gold coin and bullion has 24 carat purity and 999 fineness, similar to Swiss Coins which are currently imported.

• All coins are hallmarked as per BIS (Bureau of Indian Standards) Standards.

• The tamper proof packaging and advanced security features make it very easy for recycling.

• The partners of this scheme are MMTC, BIS and World Gold Council.

What was expected out of this scheme?

• Indian households (and temples) collectively own 20,000 tonnes of gold, a figure that is equivalent to the combined amount of gold held by the central banks of the US, Euro area and China. The government hoped that its initiative will help monetize a significant chunk of such gold holdings, which would then be melted and sold/lent to jewellers (and other users of gold), to reduce India’s dependence on imports.

BENEFITS ON OPENING AN ACCOUNT

There are many positives to depositing under the Gold Monetisation scheme:

• The gold monetisation scheme earns interest for your gold jewellery lying in your locker. Broken jewellery or jewellery that you don't want to wear can earn interest for you in gold.

• Coins and bars can earn interest apart from the appreciation of value

• Your gold will be securely maintained by the bank.

• Redemption is possible in physical gold or rupees hence giving your gold purchase further earning opportunity.

• 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 you make from it.

Performance of the scheme:

• So far, the response to the scheme seems to have been extremely tepid. Gold imports still account for more than one-fourth of India’s trade deficit and the country remains the largest importer of gold in the world despite having ceded the title of the “largest consumer” to China in the last few years.

Concerns

• The biggest stumbling block for the scheme is something the government has no control over - and that is the mindset issue.

• Very few Indian consumers would be happy to see their ornaments melted down, and any government would find it difficult to tackle 1.2 billion people's collective obsession with the yellow metal - and that too for an annual return of 2.50 per cent.

• And then there is the fear of the taxman. Individuals may be worried that if they pledge a significant amount of gold with banks, the income-tax department may want to know the source of that gold.

Reasons for poor of the scheme:

• The reasons for the lacklustre response of GMS are manifold and vary from structural issues, and deficiencies in design and dynamics related to economics of gold consumption in India.

The reasons need to be contextualised in structural disadvantage where gold is perceived to be more useful than any other asset, as it can be simultaneously used to indicate social status, stored, transferred inter-generationally and, increasingly, even pledged.Many households are unwilling to park their gold in banks because of the low interest rates on offer. 2-3% interest on gold not deemed attractive by many.

Nearly three-fourth of India’s gold stock in held in the form of jewellery and carries a lot of sentimental value. There is also a gender aspect to it, as gold in the form of jewellery allows women some sort of control over ownership and inheritance. Given this aspect, many households might prefer private schemes, which allow them to get back the gold in form of jewellery as opposed to the government’s scheme which offers cash or solid gold.

Also, it is difficult for gold purchased with unaccounted money to ever become part of official economy, since it invariably leads to questions about how the gold was acquired.What needs to be done? The Gold Monetisation scheme design has to examine the rate of interest being offered as well as the lock-in period. Bonds can be made more attractive by linking the tenor with interest rates, more dynamically.

This will make it attractive for high net-worth investors and money managers who may be interested in taking calculated risk on price while earning additional returns.The government should also actively extend the campaign to households—away from the focus on temple trusts—maybe through the use of vernacular press and electronic media.

To make the scheme market-friendly, assaying could also be assigned to select jewellers, especially branded chains, to ensure presence in at least all districts.

To incentivise collection of gold, the commission that is being offered to commercial banks—2.5% including handling charges—could also be offered to select jewellers.Finally, and most importantly, it is necessary to undertake household-level surveys to determine the attitude of households towards gold in different parts of India, and then focus on a strategy to collect gold under the scheme.

Conclusion: Gold monetisation scheme is a progressive measure introduced by the government for optimum utilisation of gold by the investors and also towards reducing India’s current account deficit. However, for the scheme to be successful, the government has to identify the gaps and correct them at the earliest.

By Gudipati Rajendera Kumar