GOLD MONETISATION SCHEME: An Implementation Perspective

Gold has always been a medium of investment and savings in our country. But gold was part of personal savings and did not play role in development process of the country. Gold imports come at second number after crude oil in balance sheets of India, so it is one of the major causes for large Current Account Deficit (CAD) in our country. In the last financial year, India spent almost 1.7% of its GDP on gold imports of approximately 1000 tonnes. Getting out 20000 tonnes stock of gold from within four walls of households and from several walls of temples is the need of hour to reduce dependence on imports and saving foreign exchange.

Hence government has launched Gold Monetization Scheme to make gold not only part of household savings and security but give earnings to individual and become a part of nation building.

Gold Monetization Scheme (GMS) will replace the Gold Deposit Scheme, 1999 but deposit outstanding under gold deposit scheme will be allowed to run till the maturity. 

Major Features of GMS

• The minimum limit to deposit gold in bank is set at 30 grams to attract gold deposit even from households which was 500 grams in previous scheme.

• To avail benefits first  a person has to verify gold purity at Collection & Purity Testing Centers (CPTC) certified by Bureau of Indian Standards (BIS) which will determine value of gold and interest to be gained in a particular time period.

• The individuals or trust or companies has to open a gold deposit account with banks to deposit the gold and earn interest on them. The Interest shall be payable in form of gold or money as opted by depositor at time of opening the account.

• The interest earnings are exempted from capital gains tax, wealth tax and income tax to attract the depositors.

• The minimum tenure is one year to get benefits of the scheme and bank will design short term (1-3 years), Medium (5-7 years) and long term (12-15 years) gold deposit schemes.

• The banks may sell or lend gold accepted under GMS to Metals and Minerals Trading Corporation of India (MMTC) to issue gold coins and to jewelers or further sell it to other banks that are engaged in GMS.

Likely Hurdles in Implementation

The schemes designed in India often look much better on paper and achieved much lesser on ground as per defined objectives when it comes to implementation. Gold has a sacred status and emotional connection with people of India. In India, no ritual is completed without presence of yellow metal like marriage or child birth or even many festivals like diwali make gold a scared thing in the culture of India. In our country, gold ornaments passed from one generation to another and this process is still persistent even in many urban centers. So condition of melting ornament to pure gold under GMS can be a major hurdle for implementation of the scheme. 

Further, the jewelry or ornaments which are locked in household or temples are generally made of 22 carat of gold but melted to form bars of 24 carat of gold. As 22 carat accounts for approx 92% purity and 24 carat accounts for 99.99% purity, so it might reduce cost to benefit ratio for investors.

The Interest rate which will be decided by banks under this scheme is one of the key factors for success of this scheme. Earlier in gold deposit scheme of 1999, the interest rate remained in between 0.5-1% and it was too low to attract investors even for temples which have large chunk of gold and spend too much for security of the same.

The unavailability of necessary infrastructure for purity check like BIS approved hallmark assaying centre across the country can prove a major hurdle in implementing as it was one of major reason for failure of the previous scheme. The people will never bother too much in finding and travelling a large distance to reach assaying center. Further purity check and getting certificate itself a time consuming process and might act as deterrence in the today’s fast modern life. The depositor has to incur an expenditure on this process to avail the benefits which will be in range of Rs 1000 to Rs 1500 and it is not a small amount for small investors.

Disclosing the source of gold or ownership proof to register for GMS may also hampers the success of the scheme as gold is mainly bought without a receipt in India and many times used as a source to invest black money. But in the recent guidelines of RBI, KYC requirement to open gold deposit account will be same as required for any other deposit account. So it may be understood that depositors need not to disclose the source but still have to provide other documents like Pan Card, etc and may come under scrutiny of income tax department. 

Further small KYC requirement or exemption from ownership proof might make this scheme a black money investors scheme like Kisan Vikas Patra to convert it into white money. Even smuggled or illegitimate gold can become legitimate one under GMS if this issues left unaddressed. However government take a partly step to address the issue by making invoices necessary for gold purchased in form of bars or coins but not in form of ornaments.    

Argument in Favour

In the recent issued guideline by RBI for GMS, it is said that for short term deposit banks need to maintain CRR and SLR requirements for this scheme as well. However the stock of gold which held by banks will be counted under general SLR requirements. So it is almost clear that for long term gold accepted under GMS shall come under SLR (Statutory Liquidity Ratio) which includes gold, government securities, T bills, etc. It will help bank to provide more interest rate of return under GMS at least for long term deposit and consequently attract more customers to deposit their gold for success of GMS.

Further other provisions like exemption from capital gain or Income tax and minimum deposit requirement is reduced at 30 grams which will be a major step to lure the small customers.

Conclusion and Suggestions

The Indian Bank Association (IBA) suggested that bank shall be allowed to accept gold deposits directly from depositors rather than refinery especially in case of temple trusts or companies which mainly have their gold in form of bullions or bars only. In future, government shall adopt a new approach to reduce time of processing by creating more infrastructures at local level or single window counter at banks, etc.

Also it is suggested that PAN number to be made compulsory only for those who deposit more than 500 gram as people who earn only 2 to 3 Lakh per annum might own gold upto 500 grams due to traditional sources and may come under scrutiny of income tax. 

Also government should try to devise a new approach with option of melted and non melted gold deposit, although non melted gold deposit might get lower rate of interest than melted one. The Government and RBI need to put in place a robust online monitoring and feedback system to track the implementation of GMS and take necessary change in guidelines as per regular feedback received from ground level otherwise fate of this scheme will be same as previous one.   

Gold can also be a great tool for women empowerment as in a family almost everything is owned by male partner or elder men like house, car or other. But gold is always owned by women only and women will be the biggest beneficiaries of this scheme. So women will be at center for success and survival of this scheme and banks need to provide lucrative offers to attract the women.