Monetising gold

Prime Minister Narendra Modi launched a scheme on Thursday aimed at monetising gold. This along with gold sovereign bond scheme and gold coin and gold bullion scheme are intended to motivate Indians to deposit their gold, which now remains more or less unproductive asset, to reduce country’s dependency on gold imports.

The growing gold consumption has several adverse macro economic implications. It contributes to widening current account deficit and can turn the balance of payments position precarious when the country faces shortage of foreign exchange. The appetite for gold also converts household savings into unproductive assets in the economy, thus blocking the efforts to convert savings into investment

India's obsession with gold is rivalled only by China, with the metal used widely in wedding gifts to brides, religious donations and as an investment. The country has amassed about 20,000 tonnes of gold worth over $800 billion in family lockers and temples.

Last year India spent about 1.7 per cent of its GDP on gold imports that range between 800 and 1,000 tonnes annually. The nation which already faces the burden of foreign exchange spending on burgeoning energy imports cannot afford to squander away precious foreign exchange on unproductive imports. Gold may have personal benefits but its economic value for the society at large is doubtful.

Individuals in India prefer to divert their substantial part of their savings to gold for a host of reasons. Gold is looked upon as religious and cultural utility, symbol of social status, and as a source of comfort due to its liquidity etc. Of late, it is perceived as an investment destination, too. Gold is also considered as a hedge against inflation.

On the contrary, the domestic gold production has almost dried up, thus making the country entirely depend on imports to meet the domestic consumption. Thus curbing the insatiable desire for gold has become an instrument of economic policy.

The return on bank deposits is negligible and even these returns are eaten away by taxes. The small savings is deliberately made less attractive to encourage investments in capital market. Real estate and other sources of private investment have become much more speculative. Thus, individuals look towards gold despite its speculative nature. Besides, gold purchases do not attract any scrutiny from tax authorities unlike bank deposits or stock investments. However, gold bonds and other gold schemes do. This is a major hindrance in diverting customers from buying physical gold to gold schemes. Thus experts predict muted response to the just released gold schemes.

The better way to divert people from purchasing gold to more productive investment is to make small savings more attractive. Opportunities to productive investment should increase in the economy. Speculative trade and investment practices need to be checked.

Household savings constitute lion’s share of India’s domestic savings as compared to government savings and corporate savings. Domestic savings and domestic investment are the drivers of India’s economic growth. Savings should be channelised into investment to ensure both personal value and societal gain.