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In this article, we would discuss about the soon-to-be-launched schemes to monetise gold .
On September 9, the Union Cabinet approved the gold monetisation and gold bond schemes in order to channel idle gold in Indian households, institutions, temples, etc into the market. Expected to be launched soon, the aim of the schemes is to reduce demand for the metal and, by doing so, bring down imports. Finance Minister Arun Jaitley said that as proposed in the 2015-16 Budget speech, the schemes would help people earn interest on their gold reserves that largely remain commercially unutilised.
Making gold a productive asset
Jaitley stated that this is the main goal, which would help in reducing imports. India annually imports around 1000 tonnes of gold. Annual investment demand for gold is projected at 300 tonnes a year. India's present gold reserves add up to over 20,000 tonnes, which are mostly neither traded nor monetised.
Gold Monetisation Scheme (GMS)
- This scheme is likely to be launched around Diwali with a 1.5-2% interest rate on gold deposits.
- People can open a Gold Savings Account with a bank to deposit their commercially unused gold on a short (1-3 years), medium (5-7 years) or long term (11-15 years) basis.
- At a BIS-approved hallmarking centre, the ornaments/coins/biscuits would be melted and its purity ascertained through a fire assay test.
- The minimum quantity that can be deposited is 30 grams.
- Interest would be payable after 30-60 days of opening the account. While banks would determine interest rate for short term deposits, for medium and long term deposits, the rates would be decided by the RBI in consultation with the government.
- The highlight of this scheme is that interest earned is exempted from income tax and capital gains tax.
Sovereign Gold Bond Scheme
- Under this, people can buy gold bonds instead of buying gold in its physical form. This is expected to reduce demand for physical gold and help in keeping the current account deficit (CAD) in check.
- The scheme will have an annual cap of 500g per person and such bonds would be issued for a period of 5-7 years.
- The bonds will be issued in 2, 5 and 10 grams or other denominations.
- Jaitley stated that the tenure could be for a minimum of 5-7 years in order to protect investors from medium-term volatility in gold prices.
- The interest rate will be decided by the government based on the value of gold at the time of investment. It could be fixed or floating rate.
- The quantity of gold invested can be redeemed at the price of gold at that time. If the gold price slumps during the period, the customer has a rollover option (reinvest funds from a mature bond into a fresh issue of the same bond) for 3 or more years.
- The bonds can be used as collateral for loans. The permitted Loan to Value ratio (ratio of the loan amount to the original value of an asset. It is significant for risk assessment) is 75%.
Pros and Cons - Gold bond scheme fares better
If the schemes succeed the government would gain through low-cost borrowings. But, what is in store for retail investors?
- Being able to use the gold bonds as collateral is a major plus.
- The GMS is beneficial as people can not only invest and earn interest from idle gold but also have the investment exempted from capital gains tax.
- However, the GMS is not a shiny prospect as investors have to get their ornaments melted before depositing. On maturity, they can redeem the gold value besides moderate earnings from an interest rate of around 1.5-2%, a not-so-attractive proposition for customers.
- Most people would be unwilling to have their ornaments melted for a miniscule return as they have a sentimental value attached to them.
- Though customers have the option of taking back gold on maturity, they would have to shell out making charges (roughly 5-15%) to get new ornaments made.
- Experts feel many would steer clear of the schemes to avoid inquiry into the source of funds as it is a known fact that people use unaccounted money to buy gold. Even those with accounted money carry out cash transactions to avoid value-added tax. On the other hand, it would be difficult to establish the source if people produce assets that are family heirlooms or gifts, etc.
- Major workload falls on hallmarking centres as they have to melt the gold, clean it and assay it before it is deposited. However, there are only 350 such centres and not all of them have melting facilities. Thus, for the realistic success of the scheme the government has to establish more such centres.
- Further, though banks can keep the deposited with refineries, many of them do not meet the required standards of quality.
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