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Gold Monetization Scheme (GMS), Discuss.

The adoption of Gold Monetization Scheme (GMS) has recently been announced by the finance minister of India, Arun Jaitley. The catch in this scheme is to mobilize and channelize large chunks of stashed gold held by Indian households and institutions in the country so as to slash the number of imports of the yellow metal, which is continuing to create a huge burden on the Forex Reserves. This will also create a pool of gold that is will be made available to the gems and jewellery sector.

Under this scheme, the customers will be required to get their reserves of golds tested for purity by the banks and only then will the banks accept the gold from the customers as a gold deposit. This scheme has various benefits not only for the customer but for the government too. The government will substantially be able to cut short its imports of gold, as India being the second largest consumer of Gold, after China, out of which 97% is imported. This scheme also provides a way to unleash the gold locked up by the households. The gold collected by the banks could further be used to lend to other companies who will melt the metal and make use of it in jewellery. The return banks will receive on lending will be funded by the revenue that companies using the gold will earn. This will help the government exercise an opportunity to reduce its deficit. Also the Reserve Bank of India (RBI) will successfully be able to promote the functioning of public sector banks as this will add on to the operations of the public sector banks.

This scheme even after being quite beneficial, may however face a few roadblocks. This may happen mainly because most of the households have gold reserves in forms of jewellery which may not fit the requirements of the scheme. Also gold prices are volatile enough to scare investors away. There is yet a great amount of ambiguity regarding the benefits that this scheme holds, yet it is learnt from a few sources that the banks will initially give away a rate of 2-3% of interest on gold deposits, which may not be able to lure many investors in the early stages of the scheme. The ambiguity also holds regarding how much percentage of gold could be lent by the banks and how much of it should be retained back in case the customers come marching one random day, demanding for their gold deposits. Also the government must first have to ensure a proper infrastructure that will be able to support the security of gold in ginormous quantities, before it can start making promises to investors regarding their gains. Besides this being a new idea, may make investors a little sceptical about playing with their highly prized possession of Gold. Again such a scheme will clearly expose the amount of gold an individual household possesses, once this is noticed in the eyes of the government, it would mean a higher tax burden on people. Households will thus end up getting involved in unnecessary interrogation by the government, something which anyone would prefer avoiding. Also in case people prefer to get back gold in return of their deposits, at the end of the period, this would clearly mean that they would end up owning a greater amount of gold of the period.

I also believe that it is difficult for any investor to put trust in the Indian government after the number of scams that followed. The scheme undoubtedly attracts a lot of attention in paper but will be put to its actual test once it starts functioning in the markets. Also many investors look at gold as a means of insurance rather than investment, an insurance that will act as a shield in future against economic monsters like inflation, depression and weakening of Indian currency. This again puts a huge question mark on the success of the GMS.

Albeit, the scheme has its own loopholes and uncertainties attached to it, yet it�s worth reiterating that the cultural nuances attached to gold in India will always mean that such schemes will manage a moderate success. It may not attract much attention in the beginning, after its launch, but it surely has the potential to induce Indian minds to consider Gold as an investment option in near future.

Mallika Verma