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All That Glitters – A New Gold Monetisation Scheme

Vivek Srivastava discusses the pros and cons of a new scheme floated by the government

Vivek Srivastava
Publish Date: Nov 30 2015 3:10PM | Updated Date: Nov 30 2015 5:41PM

All That Glitters – A New Gold Monetisation Schemephoto by hrishikesh bhatt

 In an effort to attract tons of gold worth billions lying idle in lockers, Prime Minister Narendra Modi recently launched three gold related schemes. The sovereign gold bond schemes, gold monetisation scheme and ‘India gold coin’ bearing the Ashok Chakra.

Through sovereign gold bonds, the government aims to bring down gold imports and provides an alternative to physical gold.  Instead of buying gold in physical form, investors can buy money in bonds which are backed by gold.
In the gold monetisation scheme, the deposit will be raw gold. Through this scheme the government aims to reduce the country’s forex reserve which is depleted as people tend to buy imported bars and coins, an unproductive asset. Gold imports pushed India's current account deficit to $190 billion in 2013, and the government was then forced to hike import duty to 10 percent.
This however, is not the first time that government has experimented with gold schemes. In 1962, a 15 year old gold bonus scheme with a 6% return was launched. This led to traders investing heavily into the scheme, as they not only got a fixed return, but the value of the gold also appreciated during that period. The government was then forced to introduce the gold control order in order to control the heavy investment by the traders.
In 1999, another gold deposit scheme was yet launched, which also proved to be a failure. Falling way below the expectations of the government, only 20 ton of gold was deposited by investors, as the government had kept a low interest rate and a higher minimum deposit requirement. 
Experts though are of the opinion that the new scheme might work this time, as the interest rate offered has been increased from 1% to 2.5%, and the minimum deposit level has been brought down from 500 grams to 30 grams as compared to earlier schemes. 
The interest earned on the deposits is tax free and the capital gains that arise from trading or redemption of these deposits are also exempt from tax. 
The research firm ‘India Rating’ in one of its report has also stated that the new gold monetisation scheme is being welcomed by investors. 
"The gold monetisation scheme is also a welcome step taken by the government to unlock the value of gold held by households/institutions.... Also, it is an improvement over the existing gold deposit scheme 1999," the report said.
Their argument is also backed by UBS Securities which states that a survey conducted by the agency showed that a large proportion of respondents are likely or highly likely to deposit gold under the scheme. 
"Combined with the government's strong push for the announced gold schemes, there's a reasonable probability that they would perform better than previous initiatives and also vs consensus ( it is expected to perform better than market expectations) . It also indicates that a high percentage of respondents are actually open to the potential for temples to deposit gold," the report stated. 
ICICI bank managing director and chief executive officer, Chanda Kochhar said that this scheme will unblock huge amount to gold wealth which can be used for development.  
"The sovereign gold bond scheme serves as an effective financial investment instrument and still provides the benefits that consumers usually buy physical gold for. This will help re-balance the profile of household savings from more traditional forms of gold purchase towards a more productive form," said Kochar. 
The All India Gem and Jewellery Trade Federation (GJF) is also optimistic regarding the government’s gold monetization scheme. 
"The Gold Monetization Scheme is a wonderful concept of monetising domestic idle gold and brings it to the use of the industry to help reduce imports. The dynamics of scheme's design and interest paid to depositors will play a major role in the success of the scheme. The previous GMS failed due to many factors and merely a new packaging will not help bring the desired change of success," said Ashok Minawala from the GJF. 
While it is indeed a welcome step by the government, few investors are skeptical about the scheme.  They argue that the scheme may fail if the gold continues to slide, as the investor will prefer to buy gold in hope of future appreciation and will hesitate to invest in a bond which is a higher substitute.  
 "It would have been better if the government had decided that the bond allotment would be at the then prevailing rate," opined an expert from a research firm. 
Investors also fear that they can be hounded by tax authorities, as they will have to disclose their permanent account number, if the value of gold is worth more than 50,000 rupees. Investors say that government can keep a tab on the source and after subscription to the scheme they can even be investigated by tax authorities. 
Also in India, gold jewelry is passed through generations within a family. Producing a bill for this jewelry is not possible. This would in turn create problems for the investor who wishes to deposit gold, in monetization schemes. 
Experts also suggest that Indians are reluctant to part with their jewelry since it will be melted. Also in India, impurity in jewelry and other gold related products is a major problem.  Depositing these gold items, and refining them, would mean that depositors are bearing losses, almost 20-30 percent of the weight of jewelry is lost when it is melted.
“I think that initially the investment part of gold coins and bars will get monetised and as people become comfortable they may even look to part with their jewelry that they don’t use,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.
Experts also say that many may find conventional bank deposit rates of 8 percent more attractive than the monetisation schemes. They are of the opinion that if the interest rate offered were higher at around 4 per cent then the scheme would have had better chances of success. Also, it will still take some time for scheme to be successful as most of the demand for gold comes from rural areas.  
Indians love their gold and it is a challenge for the government to convince people to move towards monetisation schemes. Since gold is passed down generations within a family, it holds sentimental value, which makes it difficult for people to part with it.