Gold monetisation: A master stroke by govt

The decision to offer higher rate of return (2.25-2.5% as against up to 1% on gold deposits by banks) is a master stroke by the government, which has been striving to make this scheme work. As Firstpost has noted before, offering interest rate is critical to make the gold monetisation scheme attractive since there is not much appetite on the part of public otherwise to invest their household gold

For those who possess gold as an investment asset, the higher rate of interest (2.25 per cent to 2.5 per cent) offered by the government under the gold monetisation scheme (GMS), which will be launched by Prime Minister Narendra Modi on Thursday, is an opportunity. This rate of interest is attractive considering that till now gold deposit schemes offered by banks have been offering much lower return (up to 1 per cent).

The decision to offer higher rate of return is a master stroke by the government, which has been striving to make this scheme work. As Firstpost has noted before, offering interest rate was critical to make the GMS attractive since there is not much appetite on the part of public otherwise to invest their household gold. “For people who have gold as an investment asset, it is a good opportunity to gain some interest out of it,” said Gnanasekar Thiagarajan, director of Commtrendz Risk Management.

“Gold is always written off as a zero-yield instrument compared to equities, which give dividend and fixed income which gives fixed interest. The GMS scheme might help to thrash that image,” Thiagarajan said. Going by the structure of the GMS, an individual or entity can walk into a test centre and get the gold melted, purity assessed and converted into bars, against which the bank will issue a certificate to the holder. On this deposit, the customer earns an interest rate decided by the bank, which will be exempted from income, wealth or capital gains taxes. On maturity, the customer can get the gold or cash back plus interest amount.

The government has notified to offer a rate of 2.25 percent on medium-term deposits (5-7 years) and 2.5 per cent on long-term deposit (12-15 years). The current scheme is pretty much same as the gold deposit scheme that has been in existence for long. One key difference between the two is the minimum quantity of gold that can be monetised. This has been brought down to 30 grams in the GMS compared with 500 grams under the existing gold deposit scheme. Hence, this time, the government seems to target HNIs and households rather than temples and trusts.

The government hopes to mobilise at least part of the idle gold stock lying in the households and institutions in the country (estimated around 20,000 tons) and use it for productive purpose. India is the largest importer of gold in the country with annual gold imports around 800 tons. The government wants to bring down the reliance on gold imports, which constitute a significant part of India’s import bill after crude oil and thus address the stress on country’s current account deficit.

May not be a big hit still

The chances of GMS becoming a big success are still doubtful considering the approach of Indian consumers towards gold. Most Indians look at gold linked to tradition and customs, rather than as a mere investment asset. Parting with their gold ornaments, even the idle ones, is a last resort for her. According to the World Gold Council, more than half of India’s demand for the precious metal is for marriage purposes.

It would be unwise to expect households to actively participate in any schemes that involve ‘melting’ the long-preserved jewellery. The past record of the gold deposit schemes that have so far received lukewarm response is a proof for this. For instance, SBI’s gold scheme, though in existence for several years, hasn’t taken off well as the bank has managed to mobilise only about 8 tonnes so far.

Similarly, it will be difficult to convince temple trusts to part with their gold treasures since the gold lying in temple vaults are linked to faith and religion. Also, like in the case of Thiruvananthapuram Padmanabhaswamy temple, the treasure in temple vaults has tremendous antique value. Melting this in return for a certificate is unlikely to be a welcome idea to the temple managers. However, for those who possess gold for just investment purpose, the scheme offers an opportunity to get some return.

Channel for black money

Another major challenge for the government will be to check the possible flow of black money into the financial system through this scheme. Those, who have unaccounted wealth stored in the form of gold ornaments and bars, will find this as an excellent opportunity to legitimise their ill-gotten wealth. Also, they can split the gold into tiny instalments and approach banks either by themselves or a benami to escape filters. Since gold is typically bought in cash in India and there is no documentation required for the purchase, it will be difficult to verify the ownership of the gold deposited under the GMS.

There is also a possibility that such transactions might come under the scanner of taxmen. But, the important point here for the investors is that probably for the first time gold is emerging as an interest-yielding asset that can yield attractive return on investment. Those with unused gold, and want to use this for investment, the 2.25-2.5 rate of interest is an attractive bet to get some return on their yellow metal.

By Dinesh Unnikrishnan