Gold monetization scheme, a well thought proposal and a calculated strategy by the government to bring into main circulation the assets of the nation in the form of yellow metal lying dormant in bank lockers. It is an attempt to change the people�s perspective of gold from a security to an investment.
The draft gold mobilization scheme was announced by the finance minister of India Mr. Arun Jaitley on May 19th, 2015 through e-portal, inviting public opinion on the proposal.
The MOF (Ministry of finance) hopes by this strategy to reduce the CAD (Current Account Deficit) caused due to the gold import that has mounted to 87.8 US dollars and is a whooping 4.7% of the GDP.
SCOPE OF THIS SCHEME
India's gold demand is a 26% of the total world demand and is second only to china.
The domestic gold assets - a dead investment with individuals and institutions is nearly 20,000 tonnes worth Rs 60 Lakh crores.
Channelizing the domestic gold holding would ease out the burden of CAD incurred by gold imports and also plug the outflow of the foreign currency.
PRINCIPAL GUIDELINES FOR THE FUNCTIONING OF THE SCHEME
The investors could invest with a minimum of 30 grams in any form (jewellery or bullion)
The purity of the metal will be established by certified purity centers or gold refineries. The refineries could be meted out the responsibility of holding the gold for a fee or the banks may decide to hold it themselves.
The investor can gain interest on the gold account commencing from 30/60 days of investment.
The minimum period for investment would be 1 year and redemption would be permitted after multiples of the minimum investment period.
The investor has the option to redeem in cash or gold and the choice has to be made at the time of investment.
Gold and jewellery industry could gain momentum as the scheme would enable jewelers to procure gold against their gold loan account at a much lower rate than what they are paying currently on their fund based bank limits.
Banks play the role of a crucial intermediary and pass on the interest gained from G and J entrepreneurs to the investor after retaining their own incentives.
As a major incentive, the banks are permitted to deposit the gold brought in as CRR/SLR with the RBI.
Banks may sell the gold in the international market to generate foreign currency.
Banks can convert the gold deposits into gold coins for sale.
Banks may use the gold in domestic commodity exchanges.
Deciding the interest rate for the investors is a prerogative of the banks.
Investors gains interest on their gold which was dumped away in the lockers and the interest earned over a period of time could increase their gold holdings.
The interest gained on the gold account is exempt from income tax, wealth tax and tax on capital gains.
Enticing the investors to give their gold holdings for recasting is a huge challenge, particularly because Indians are emotionally attached to their jewellery and consider it more than a piece of ornament. Moreover the customer loses out on the making charges and there are further losses due to stone and stud removal.
The process itself sounds tedious and cumbersome from getting the gold assured from the authorized refineries to providing documental evidence for their gold holdings.
Presence of multiple intermediaries with shared incentives would adversely affect the investor�s gains.
Under the KYC (know your customer ) stipulation for the banks, the investor has to produce documental evidence and justify his right to possession of his gold which would bring him under the scrutiny of the income tax department.
India being a major consumer of gold globally, its pulling off the market would make price fluctuation inevitable. Moreover, the banks with their right to sell the gold holdings may create a surplus and hence reduce the demand.
An infrastructure with certified refineries empanelled in line with LBMA requires being set up for the safe and smooth handling of the gold.
A gold bank or another single window institution should be set up to ensure a streamlined implementation of the scheme and render the process hassle free for the investors.
Banks need to let go a percentage of their incentive in favor of the investors as only a higher interest rate could lure the investors to invest their dear gold.
Overall the MOF does deserve pat on the back as the thought is both pragmatic and desirable. But they must ensure that the implementation of the program is target oriented and transparent to build the faith of their investors and erase the unpleasant memories of the failure of such gold monetization schemes in the past.