Gold Monetisation Scheme Details Pros and cons
The message from Finance Ministry in the new budget was loud and clear: Why not deal in virtual Gold when everything under the sky is getting virtual? And hence, here we have Gold Monetisation Scheme in which you can deposit your gold in bank and earn interest on it. And this scheme has been officially launched by PM Modi on 5th November 2015.
Majorly, government would implement the Gold Scheme in 3 ways
- Gold Monetisation Scheme :- Banks would borrow physical gold from common people and sellers and offer lucrative interest on it. This would help secure the physical gold and would no more be a dead asset for the individual or for the nation.
- Gold Bond Scheme :- The government and banks would offer Gold ETFs or Gold based debt funds, the value of which would be managed and vary as per the current value of physical gold in the market.
- Gold Bar Yojana :-Government would get started the manufacturing of gold coins with Ashok Chakra imprinted on it.
In the entire process, there is a possibility that government may have to hedge the risk for which it may sell those bonds or loans in the international market through debt securities similar to gold backed sovereign bonds. This would be quite similar to what European Central Bank improvised in 2012.
And Alternative Financial Asset in Gold Monetisation Scheme
The gold Monetisation scheme would create an alternative financial asset or an option to purchase and posse’s metal gold while being secure. The bonds are said to carry a fixed interest rate the virtual gold would be redeemable in cash on account of face value of gold at the current time of the redemption.
The idea behind the entire scheme is quite noble and if implemented well, may serve to cater to many individualistic as well as national crises. Every year India has to import around 800 to 1,000 tons of gold. However, keeping every citizen’s and organization stocks in consideration, India already has more than 20,000 tons of gold. However, this gold is neither monetized nor traded and thus there is always a shortfall. This scheme, as mentioned by the honorable finance minister, would mend this gap to a larger extent.
How would Gold Monetisation Scheme impact the internal market?
As per the Executive Director of Senco Gold, Mr. Suvankar Sen, the Gold Monetisation Scheme would increase the availability of Gold metal in our domestic market and would thus help the jewelers. We further hope that this would also bring down the prices of gold in domestic market and would minimize the import. This all put together would help the end buyer to save a lot of money on the cost, he adds.
The finance ministry sees this scheme as a medium to make gold an integral part of financial system, at large. The council which had been working for Gold Monetisation Scheme for long, hopes that it would serve as a customer friendly and structured gold Monetisation process.
There are two main benefits of the scheme:
- First, it would minimize the dependence of economy on imported gold since inspite of being of the largest producers of gold; India still has to import 97 per cent of its annual gold demand. This drains out if foreign exchange reserves and if one of the key reasons for falling rupee value every time.
- There is already a lot of gold left unproductive in the country in the form of household lockers. With this scheme, this unproductive yellow metal in the bank lockers could be made to strengthen the economy by offering it to those who actually need it.
- Second, gold stocks represent personal wealth; however, this wealth is just a notional and is nowhere a contributor in the actual growth on a regular basis. It is simply in the form of a virtual security. If someone is offered the same price by taking their gold, it could be used for stabilizing the deficit, which arises every year leading to hefty imports.
- The scheme does talk about gold securities, however, it is not about the deposit of jewelry but to convert them to gold bars, which is something that would not be able to interest many people. This scheme could only succeed if people buy gold coins and deposit it under the scheme. For that, a fair amount of gold coins need to be manufactured and this is certainly a herculean task.
- Now, for those who already have lot of gold in the form of jewelry would be required to convert their jewelry into gold coins. This process of conversion would come with its making charges which may vary anywhere between 10 to 30 per cent. This is something that not many people would be interested in doing.
- Either the government would need to come up with something innovative to cater to this concern or would have to be lucrative enough in selling affordable gold coins under special offers. This is something of which we are not really sure of, as of now and will have to wait and watch how it works.
The scheme is divided into 3 parts
- Interest Earned in scheme would come in the form of gold ie if you have deposited 1kg gold for say 1 year and since the interest currently for this is 2.25% so you will get back 1.025 gms of gold or its equivalent money
- There is no minimum or maximum limit specified as of now
- No clarity have been given about taxation of the interest earned
Should I invest in this scheme?
According to me this scheme is not good for jewelry for an individual person. Trusts or temple can be benefited using this. You if have gold bars or coins and if you do not won’t to monetize them for a longer period then this scheme would be good for you. Taxation is not clear but a lot would depend on it
Institute or Banks that are officially enrolled
This is also not clear but for sure SBI, PNB and other nationalized banks would be participating in this.
This scheme would officially be starting form 5th November 2015 and there is no last as such.
To sum it up, it is quite unanimous that there is a dire need to understand the role of yellow metal in growth of any economy. This scheme would certainly mobilize domestic gold and it is a good sign that Indians value gold as an investment and not simply a consumption item. Gold stands at the top of every household’s priority and this scheme can play a larger role in lifting the overall fiscal situation of the Indian Economy.