Insights into Editorial: The Sum of Three New Gold Schemes + Mindmaps on Issues
TO reduce India’s gold imports and mobilize the gold held by public, the union government recently launched three new gold schemes. The government has also periodically sought to limit gold imports by increasing the import duty on the yellow metal, but these moves met with limited success.
Why these new schemes were necessary?
- India imported Rs. 2.1 lakh crore worth of gold in the financial year 2014-15. So far, Rs 1.12 lakh crore worth of gold has been imported between April and September 2015. This has widened India’s current account deficit and trade deficit.
- Gold also diverts savings from financial assets and costs the exchequer foreign exchange, and is far from a safe investment.
Schemes and issues associated with them:
Gold Monetisation Scheme:
- Under the scheme, individuals who deposit their gold in authorised bank, receive interest. It works somewhat like a fixed deposit.
- The scheme will replace the prevailing gold deposit scheme that started in 1999.
- Deposit limit: Under this scheme the minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme.
- Time period: The designated banks will accept gold deposits under the short term (1-3 years) Bank Deposit (STBD) as well as medium (5-7 years) and long (12-15 years) term government deposit schemes.
- All scheduled commercial banks are allowed to implement this scheme and are also free to fix interest rates.
- Depositors can also make premature withdrawal of their deposits. It will be subject to a minimum lock-in period and penalty to be determined by individual banks.
Issues associated with this scheme:
- Cultural issue: For long, Indians have been closely associated with gold. Getting them to part with their gold, especially when it is in jewellery form, is very difficult. Under the scheme, the depositor has to make clear in the beginning whether he/she wants to redeem it in cash or in gold. Even if it is in gold, the banks will return them in standardised gold bars That is likely to meet with a lot of reluctance.
- Returns on gold: Banks pay interests on the deposited gold. These interests, rather than encouraging individuals to part with the gold they already hold, will encourage more canny entities to import large quantities of gold and deposit them with Indian banks as the returns will be high. If that happens, then the entire purpose of the Gold Monetisation Scheme is negated.
- Liquidity issue: According to the Scheme, the banks can lend or sell this gold to jewellers or other banks that are part of the Scheme. However, gold is not as fungible as cash. A cash deposit can be given to anybody. But a gold deposit can only go to those looking specifically for gold. Thus, there is a non-zero chance of banks finding it difficult to match gold borrowers with gold depositors. That means there could be a situation where banks don’t have enough interest accruing to them to cater to the interest they have to pay gold depositors.
Sovereign Gold Bond Scheme:
- It seeks to encourage people to buy gold bonds instead of actual gold.
- The Reserve Bank of India (RBI) will issue these bonds on behalf of the central government.
- The gold bonds will be denominated in multiples of gram(s) of gold with a basic unit of one gram while the minimum investment limit is two grams.
- The maximum subscription is 500 grams per person per fiscal (April-March) and for joint holders, the limit will be applied on the first holder.
- As per the scheme, the gold bonds will be sold only to resident Indian entities including individuals, Hindu undivided families, trusts, universities, and charitable institutions.
- The bond tenure will be eight years with exit option beginning the fifth year onwards. They will also be tradable in the bourses.
- These bonds can also be used as collateral for loans.
- The price of gold internationally is linked to the dollar. The new gold bonds, if made attractive enough, could become a substitute to rupee bonds. Indians will start putting their money into a type of dollar bond rather than rupee bonds. This might exert an upward pressure on interest rates.
Gold Coin scheme:
It is supposed to recycle gold sourced from the monetisation effort. It will clearly succeed only if the deposits prove a hit. If not, it could actually end up adding to the country’s bullion imports
The above mentioned implications are far from inevitable outcomes. They are just possibilities that the government must consider now rather than having to fix them once they happen.
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