A nation of households hooked in to gold, the success of the all new Gold Monetization Scheme (GMS) proposed by the Central Government is questionable. The proposed GMS goes to hit some bedrock if not tackled properly. Experts have critically analyzed the scheme from every aspect and sadly, there are too many hindrances that we’ll briefly discuss. But before we do so, allow us to attempt to understand the proposed scheme and answer the question – ‘why was this scheme proposed within the first place?’
Gold Monetization Scheme proposes the following:
Mobilization of gold help by Indian institutions and households.
Making the preserved gold to jewelers and banking institutions.
Reduction of India’s gold imports through mobilization of existing gold.
Improvement of market liquidity.
Converting the gold of the purchasers into a secure performing asset.
Simply put, government wants Indian institutions and households that stash gold to offer away the gold to government against an interest earning. This gold will then be taken by government and circulated in economy to scale back gold import burdens. So, the gold becomes an investment vehicle for those that hold it reception or at institutions.
The ‘How’ of GMS
The question is, ‘how does the govt shall achieve this?’ For the proposed scheme to figure , a draft plan has been chalked out which are weakened into following components:
Gold owner (can be households or institutions) got to approach a bank and open a Gold bank account .
They need handy over the gold (usually in sort of jewelry and coins) to Assaying centers.
These centers will then assess the purity and supply a receipt to the owners.
These Assaying centers will then inform the banks about the gold value that must be credited to the Gold Savings Accounts of the purchasers .
At now , the banks will send the collected gold to refineries where the jewellery are going to be melted and stored in sort of bricks.
The refineries will then be liable for sending the gold bricks to jewelers whenever instructed by banks. The banks won’t really sell the gold to the jewelers. they’re going to simply loan out the metal to the jewelers who will later got to repay the bank with interest.
Since the Gold Savings Accounts act as investment accounts for original owners of gold, there’ll be a maturity period. Once the amount is over, bank will return the gold to the owner along side interest. The interest are going to be in a similar way and not cash. this suggests that the interest also will be paid call at gold.
The ‘Why’ of GMS
Why has government proposed Gold Monetization Scheme in first place?
Indian households and institutions hold nearly 20,000 plenty of gold.
The total value of this gold reserve is $1 trillion (US Dollars).
$1 trillion makes up quite 50% of the nation’s GDP (Gross Domestic Product).
Mobilizing and monetizing even alittle percentage of this mostly-unused gold reserve will significantly reduce India’s gold import requirements. When this happens, extra money are going to be available in market to spice up up Indian economy.
The increased liquidity are often diverted towards other causes like healthcare, education, agriculture, transport infrastructure development, repayment of international debt etc.
What are the advantages of GMS for end users?
For depositors, Gold Monetization Scheme intends to supply two benefits:
As low as 30 grams of gold are often deposited.
There will be no tax , wealth tax or capital gains tax levied on the Gold Deposit Accounts.
Interest Rate on GMS would be 2.25% to 2.5%.
There is no maximum limit
How do the banks shall utilize the accumulated gold?
There are several ways during which the bank can utilize the gold reserves:
Lending to Jewelers: Banks can lend the metal to jewelers and earn interest thereon lending. Additionally, lending the gold to jewelers will help reduce the entire gold import. As import bills are dragged down, the present Account Deficit (CAD) of state are going to be reduced. CAD occurs when total value of imported services and good is bigger than total value of exported services and goods. CAD means the country is using international aid to work . this is often a liability and eventually needs repayment. So, excessive CAD is bad and reducing CAD is sweet for economy.
Invite Foreign Currency Inflow: Banks can actually sell the gold reserves to other countries and invite Foreign Currency in country, not in sort of a debt but in sort of earnings. a gentle reserve of foreign exchanges will help to stabilize Indian currency value and hence, make it stronger against other currencies of the planet .
Use Gold to satisfy CRR and SLR Requirements: CRR or Cash Reserve Ratio and SLR or Statutory Liquid Ratio are two basic requirements that banks got to fulfill so as to remain operational. These are literally cash reserves that banks got to maintain with RBI to affect sudden liquidity mismatch and stop bankruptcy. it’s been proposed that banks be allowed to take care of CRR and SLR using the mobilized gold. this may allow banks to circulate extra money in economy, which can provide the much needed impetus for economic process .
What are the issues with Gold Monetization Scheme?
Here are a number of the issues as acknowledged by experts:
The affinity for gold among Indians isn’t due to the price it holds. it’s purely cultural and emotional. Indians are going to be reluctant to ascertain their valued gold melted and lent or sold. Particularly in South India, gold jewelries are heirlooms. this is often getting to be a serious trouble.
A person depositing the gold possessed as heirloom won’t have proper documents to prove that the gold belong to him or her.
this is often where black money and white money comes into play. Some may produce legitimately owned gold. Others may present illegally acquired gold. there’ll be no thanks to tell the difference in absence of proper document. Thus, government will actually open up how for frauds to convert their black wealth into white money.
Banks shall pay interest to depositors in gold and earn interest from jewelers/borrowers in cash. Earning in cash and paying in gold creates the danger of serious mismatch which will eventually cause catastrophic results.
International Basel norms might not permit the banks to form CRR and SLR deposits in gold and RBI isn’t much comfortable with the thought of gold deposits for CRR. this is often because CRR is supposed for handling liquidity mismatch and using gold as CRR will cause extreme volatility due to gold prices changing continuously. There could also be instances when drop by gold prices may cause drop by CRR. The minimum CRR requirement is 4% and RBI isn’t very keen on risking this.
The aforementioned problems are quite serious and government must address them properly before rolling out the Gold Monetization Scheme on a grand scale. an identical scheme already existed before the GMS was proposed during Union Budget 2015-2016 with the sole difference being the minimum deposit requirement that was set at 500 grams.
Ashok Chakra Gold Bond Coins
Government also will be launching first ever Ashok Chakra Gold Coins. Initially it’ll be of 5 gms and 10 gms. Cost of those coins are going to be lesser then market value .
List of Ashok Chakra CoinsSno Weight
1 5 Gms
2 10 Gms