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Gold Monetisation Scheme - The Shining Investment

Posted in Finance Articles, Total Reads: 1482 , Published on August 15, 2015

The first question that comes to our mind is what is Gold Monetisation Scheme? Gold Monetisation Scheme is a scheme announced by Arun Jaitley India’s Finance Minister in his Budget 2015-16 which provides a facility to the holders of gold to earn interest on gold deposit accounts. The outline of the scheme has been prepared in due deliberations and consultations with various stakeholders. The stakeholders involved in the scheme includes Banks, Refineries, Hallmarking centers, Jewelers Association, Reserve Bank of India and various other Government Departments.

In the process of announcing several steps for monetizing gold, the Union Finance Minister in his Budget 2015-16 stated that India was estimated to have over 20,000 tons of gold and most of the stock of gold was neither monetized, nor traded. A Sovereign Gold Bond which is an alternate financial asset and an alternative to purchasing metal gold has also been also been announced by the Finance Minister in the Union Budget 2015-16. An Indian Gold coin bearing the Ashok Chakra would also be worked upon by the Indian Government as per the recent announcement of the Finance Minister. Coins minted outside India will face reduction in their demand due to this Indian Gold Coin. This will also help to get gold recycled in India. The proposed Gold Monetisation Scheme would replace both the Gold Deposit & Gold Metal Loan Schemes. The proposed scheme would be beneficial to both the depositors as well as the jewelers. The depositors would earn regular interest on the metal account and the jewelers would be able to get loans. Even a damaged or broken piece of gold jewellery kept in the locker of a bank would help the depositors earn an interest of about 2-3 percent.

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When we talk about the process of Gold Monetizing Scheme, at first the banks and the agencies are specified for maintaining the Gold Deposit Accounts of the depositors. The purity of gold is determined and the exact gold quantity is credited to the account of the depositor when the customer brings in gold to the counter of the banks or the specified agencies. The banks and the specified agencies ask the customers to follow the KYC (know your customer) process. The minimum period for which gold is deposited is a year and the minimum quantity of gold that can be deposited is 30 grams. The minimum quantity to be deposited was kept as low as 30 grams just to ensure that even small depositors are encouraged. But then the problem with the scheme is that major segment of the gold owners may not get attracted to the scheme as the average gold investors are conservative people who may not like to part with their gold stock just for a certificate from the bank. The scheme does not persuade a major chunk of the gold investors. The government may try hard to assure the depositors about the protection of the gold value or regularity in payment of interest to be paid in gold, it is bound to receive resistance from most of the households. Now when it comes to interest rates, it is decided by the concerned bank. The interest rate charged by the bank from the jewelers for lending the deposited gold is slightly higher than the interest rate paid to the depositors of gold. But then there is something new. Unlike interest being paid in cash, the amount to be paid to the depositors will be valued in ‘gold’. For example, suppose a customer deposits 1000 grams of gold in a bank and the interest rate of the concerned bank is say 2 percent then on maturity the gold credited to his account will be 1020 grams. On redemption the customers will be given a choice of either taking cash or gold. But then the preference of receiving cash or gold on redemption needs to be stated at the time of deposit of the gold only.

Speaking about the objective behind the Gold Monetisation Scheme, the scheme was drafted keeping in view the mobilization of gold held by the households and the financial institutes of our country. Indian household and institutions hold gold worth Rs. 60 lakh crores. And in order to mobilize this gold holding by the household and the institutions in the country, the scheme has been drafted. This scheme helps the gems and jewellery industry by making available gold as raw material on loans from the banks. Earlier there was much more reliance on import in order to meet the domestic demands of gold. But now in order to reduce this reliance on import the scheme has been drafted. Foreign currency may also be generated by selling gold by the banks. The generated foreign currency can then be used either for making payments to importers or for loans to exporters. The mobilized gold may be converted into coins for sale to the customers.

Coming to the tax implications of the scheme, the noteworthy point is that there are various tax exemptions. Due examination will be conducted and after such examination, the customers may receive an exemption from Capital Gain Tax, Wealth Tax and Income Tax. The banks may also enjoy various incentives under the scheme. It is proposed that the banks may be allowed to deposit the gold as their Cash Reserve Ratio and Statutory Liquidity Ratio (CRR/SLR) requirements with the Reserve Bank of India.

The scope of the Gold Monetisation Scheme is very vast and it requires a vast set-up of infrastructure in order to facilitate easy and secure handling of gold. Thus due to the limitation of infrastructure set-up, it will not be possible to launch the scheme at once in all the cities. So it will be initially launched in a few selected cities and as and when the infrastructure for assaying and refining of gold develops, the scheme will be launched in the remaining cities also.

This article has been authored by Saurabh Kumar Agarwal from IIM Kashipur

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