India is set to launch a new gold monetisation scheme to encourage households and others to bring out their gold from lockers and the convert them into a deposit scheme that will generate them a modest tax-free income. A draft of the scheme was made public on Tuesday. In all likelihood, the scheme would be launched in a few weeks.
The scheme allows households to bring their gold, especially jewellery that lies locked up in safes at home and banks, to be purity tested, melted and deposited at purity testing centres and in lieu take a certificate with details of gold deposited that can be used to open a fixed deposit-like gold saving account with a bank. As little as 30 grams of gold can be deposited at these centres under the scheme. Both principal and interest are to be valued in gold, and on redemption from the deposit scheme, a customer can take the proceeds in either in cash or gold. Some of the gold received under the scheme would be loaned to jewellers, thereby reducing the need to import gold to meet the demand for jewellery.
So what prompted the government to launch this scheme? Industry associations, economists, financial advisors and the World Gold Council have all been recommending such a scheme to balance Indians’ desire to invest in gold with the country’s need to curb demand and import of the yellow metal. Incidentally, India is not the first country to launch a gold monetisation scheme, Turkey too had done it successfully. Five reasons why India is launching the scheme now:
1. Rising hoard of gold: Indian households held more than 22,000 tonnes of gold, a World Gold Council and FICCI study in December 2014 estimated. And, this pile continues to rise as gold is an essential part of weddings. Some of the buying is festival driven. Most of this gold is held as jewellery, given India’s cultural relation with gold. Only a small portion is held as bars and coins. Consumer demand for gold as jewellery as well as bars and coins was estimated at 811 tonnes in 2014 by the World Gold Council.
2. Big import bill: India has only traces of gold deposits, and there is almost no mining of gold that takes place in the country. So, India is highly dependent on imports. Gold is the second largest item of import by value. In 2014-15, India imported gold worth $34 billion. Value of imports peaked in 2011-12, when India imported gold worth $57 billion, even as gold prices rose to record high in the global and domestic market. Gold imports through official channels fell when government increased import duty on gold, but that led to a sharp increase in smuggling of gold into India. Imports climbed again as part of the import duty increase was rolled back.
3. Very little recycling: In some countries such as China – which is now the largest consumer of gold – recycling of gold is popular. Not so in India. Very little of the old gold held by Indian households is sold to buy new gold jewellery. But, there are a few years that stand out as exception. Recycling of gold increased when gold prices were rising to record highs and also when government raised import duty on the yellow metal. Thus, improvement in recycling was seen in 2009, 2012 and 2013. Due to low level of recycling, growing demand for gold jewellery has to be met by import of the metal. Even if a fraction of 22,000 tonnes of gold is deposited in lieu of a gold saving certificate and an account under the gold monetisation scheme, imports will fall.
4. Gold, a dud investment: Gold is seen as an alternate and safe investment by Indians. But most of that gold lies in lockers and safes at homes and banks, and so, it does not earn the owner any income. A holder can expect capital appreciation by holding gold, provided the price of the metal continuously rises. However, if people are offered gold-linked investment instruments such as the certificate and saving account as offered under the monetising scheme, they can earn some income too.
5. Need to ease pressure on trade balance: On the whole, India imports a lot more goods than it exports. That is to say, we do not earn enough foreign exchange from exports to pay for our imports. So, we are dependent on foreign exchange earned from services exports, inflow of foreign investment and remittances by non-resident Indians to pay for imports. In 2014-15, for instance, India exported goods worth $310 billion, but imported goods worth $448 billion, resulting in a trade deficit of $138 billion. If the import of gold had been much lower than $34 billion, the trade deficit too would have been narrower. India’s trade deficit is threatening to widen again with the rise in crude petroleum prices, the largest item of import. Therefore, it becomes imperative to contain imports of gold even as the country attempts to grow its exports.