EDITORIAL
The central government has tried to sweeten the gold monetisation scheme that it had proposed in the Union Budget in February. On the new draft proposal, the government has sought opinions of people and all stakeholders by June 2 so that that the government can take it to the next level.
Monetisation of gold is not a new idea. It had existed in the country for over a decade. The only difference is that the present proposal has tried to rid the old schemes — gold deposit scheme and metal loan account scheme — of the unwanted features which made it unpopular with gold end-users and jewellers alike. The 1999 scheme offered an interest between 0.75 and one per cent which ensured its failure. For this scheme to take off, interest will have to be attractive and that is why the interest rate has been proposed to be 3.5 per cent. What is more, the government has allowed banks to offer different rates.
Earlier, the minimum amount of deposits that a customer or an institution was supposed to park in bank or other allied institution was a forbidding 500gm. Now the government has decided to bring it down to 30gm (worth Rs84000). Among other measures proposed in the draft guidelines to make the scheme attractive are that the government is mulling to offer customers tax incentives, including tax-free interest on gold deposits. For banks, they will be allowed to use these deposits to meet their requirements of statutory liquidity ratio (SLR) and cash reserve ratio requirements. SLR is the proportion of deposits that banks must invest in government securities and Cash Reserve Ratio is the proportion of deposits they must hold with the central bank. Banks will also be permitted to sell the gold to generate forex reserves which can then be used by them for lending to exporters and importers. They can also trade in commodity exchanges or sell the gold to jewellers.
The aim of the government behind this scheme is to put a curb on imports of gold which plays a significant role in keeping the balance of payments in disarray. The import curbs imposed by the UPA government to put a check on the metal imports did not serve the purpose. The government intends to mobilize the idle gold held by households and religious bodies to spur the jewellery sector and reduce their reliance on gold imports over time. India is the largest consumer of the yello metal. The country imports between 800 MT and 1000 MT of gold every year. According to a government estimate, India currently has 20,000 MT of gold stocks worth Rs 60 lakh crore at current market price which is not traded or monetized. By allowing banks to sell the deposited gold jewellery (after they are melted) to jewellers, this huge stock of the metal can be monetized. And to this extent, the size of gold imports will be come down, saving the valuable greenbacks. This will also have a sanguine effect on value of rupees. The Indian currency lately has been on a tailspin hovering close to 64. The latest measure by the government is aimed to play a vital role in checking the runaway valuation of the dollar vis a vis rupee.
However, the million dollar question is whether there will be many takers for this new scheme. Indians’ penchant for gold spans centuries and has a lot of religious connotations. A large amount of it is held by temples and other religious institutions. Gold is also a security against financial mishaps. The government is now trying to convince households to park gold in banks. But not many have faith in financial institutions. They may not also like to break the tradition and hand over the gold handed down to them by generations to banks, that too along with a KYC form duly filled in.
Also, the new scheme asks a would-be depositor to give in writing upfront whether he or she wants to take the returns on the deposits by way of cash or gold. The metal would be melted which may not be to the liking of consumers to whom melting a mangalasutra is inauspicious. The new policy should be tweaked to allow depositors receive the jewellery as it is as, in India, gold is not only a precious metal valued for its use during a contingency, but is here in people’s beliefs and sentiments. The new policy may therefore not find many takers unless it is further liberalised.