The World Gold Council defines India as “the country that sits on a gold mine”. Well, that’s quiet a definition of India. India is indeed one of the largest consumer of gold occupying about 23% of the market share demand. Anecdotal evidence suggests that Indian household hoards around 18000 – 40000 tonnes of gold, especially the rural households. The surprisingly high amount of gold if converted to cash at current rates, will correspond to a value of $1.9 Billion which was the GDP of India in 2013. The point we are trying to make here is why not use this domestic gold and curb our needs to import the same??
The Ministry of Finance has finally come up with a one time and a probable solution to ever-increasing gold imports. Gold is the second most imported item in India after crude oil. GOI has already tried various measures to curb the gold imports. One of them was its 80:20 import policy but finally had to be withdrawn due to increasing grey market inflow of gold. India has imported around 750 tonnes of gold last year which used to be as high as 1000 tonnes in the past few years. The NDA govt has thus taken a step to reduce this further and make an attempt to create an everlasting solution for the high CAD (Current Account Deficit) levels. But were these measures taken before?
Yes! they were. In the past, we had 6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defense Gold Bond and Gold Deposit Bonds, 1999, but none of these schemes shined as the interest rates were too low at 1% and the minimum threshold of 500 grams per investment. But this time its different, NDA has probably given these problems a thought and has made the required provisions in their first draft of the Gold Monetization Scheme. The most important change being the threshold brought down to a minimum of 30 grams per investment.
What does Gold Monetization actually refers to? In simple terms, it means surrendering gold jewelry, coins, bars etc to designated banks in return for deposit certificates/bonds in return. For example, if you surrender 100 grams of gold you will receive a deposit certificate plus you will receive grams of gold as interest for the duration of the deposit. Your gold will then be melted and converted to 24 carat gold for the other side of the system to use, which will be taken care by the Gold Lending System. Although, we will not focus on GLS right now.
This move of Gold Monetization is expected to make gold as an attractive investment product if kept in the banks instead of lockers. But there are two types of investors in case of gold : holding gold as investment and other category of consumption. If you are an investor or using it as a natural hedge to your portfolio, gold monetization is best suited for you. The scheme is attractive for its interest and also the cost of lockers for storing will be nil. But if you are holding it for consumption, the melting and moulding it for making ornaments later on will result in at least 15 – 20% wastage and making charges which might not attract you towards this scheme.
The scheme is intended to attract the holdings of gold, at least 20000 tonnes, over the coming years and focus on reducing the CAD gradually. Indian Govt is therefore trying to change the mindset of people in regards to hoarding gold in households. Although, Gold Deposit Scheme would seem to work like a charm, there are a few aspects to be improved before going for it on an extensive scale.
- Getting the Indian refineries (32 of them) accredited by LMBA (London Bullion Market Association) for meeting the gold standards norms. In India, currently only 1 refinery is accredited by LMBA
- Setting up new hallmarking centers for standardized and assured assessment of the correct value of gold. Currently there are only 331 hallmarking centers in India.
- Trying to push in black money relaxation norms which refers to no investigation on the source of funds the gold was accumulated. This might help in bringing the unofficial savings into the formal economy.
Even though the threshold has been reduced to 30 grams, there might a set of people who are holding less than that. For those investors, the GOI has proposed to auction gold bonds worth Rs. 13500 Cr which is equivalent to 50 tonnes of gold. The bonds will be issues for quantities such as 5 grams, 10 grams and 20 grams and so on. Investor will save on locker expenses as well since bonds will be issues in demat forms.
To sum up, the gold monetization in India can work successfully only if enough infrastructure to facilitate the entire process is created. Lets hope the draft with minor changes gets finalized and the gold bonds are issued soon through various banking channels. If we succeed in monetizing even half of the holdings, we might see the CAD narrowing by at least 1% in the near future thus giving India the room for achieving complete independence on gold imports. We might also witness the current savings rates go up with the monetization being introduced and the “unofficial” or black money can be absorbed in the real economy.
Thank you. 🙂