Will Gold Monetisation Scheme succeed in achieving its objectives?

The scheme is touted to have the potential to change the face of Indian economy, especially by curtailing gold imports. However, it is too early to predict anything with certainty. 

Let us begin our analysis by having a look at the official objective as incorporated in the government document. The Government of India announced the Gold Monetisation Scheme vide its Office Memorandum F.No.20/6/2015-FT dated September 15, 2015. The objective of the scheme is to mobilise gold held by households and institutions of the country and facilitate its use for productive purposes, and in the long run, to reduce country's reliance on the import of gold. 

Prime Minister Modi added some more objectives to the scheme today, while launching the scheme formally in the national capital. For a better understanding of the government, let us quote PM Modi on the subject: “Today marks a big step forward; we have come up with innovative, growth oriented schemes. Indian households have 20,000 tonnes of gold. Indians invest a lot of trust in the value of gold. Indians trust our local goldsmiths, perhaps even more than our banks. We have to build a decentralised system that can rope them in. Women will benefit most from gold schemes. Gold can be a great tool for women empowerment. Non-monetisation of gold is one of the reasons for poverty in India. With these creative gold schemes, goldsmiths can become agents of change. People are usually very much concerned about where to keep their gold while they are out on a vacation; this scheme takes care of that.” 

Let us discuss the nitty-gritty of the scheme, about which our PM is so optimistic as to think of removal of poverty, empowerment of women and unearthing of 20,000 tonnes of gold through this. In bare essentials, the scheme is a replacement for the earlier Gold Deposit Scheme of 1999, which was not very successful in its objective. 

 In the latest GMS, the minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30gms of gold. There is no maximum limit for deposit under the scheme. 

The gold will be accepted at the Collection and Purity Testing Centers (CPTC) certified by Bureau of Indian Standards (BIS). The deposit certificates will be issued by banks in equivalent of 995 fineness of gold. The designated banks will accept gold deposits under the Short Term, one to three years Bank Deposit (STBD) as well as Medium, for five to seven years and Long for 12 to 15 years Term Government Deposit Schemes (MLTGD). 

While the former will be accepted by banks on their own account, the latter will be on behalf of the Government of India. There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks for the STBD.

As far as interest rate is concerned, in the case of STBD, it will be determined by the banks. The interest rate in the medium term bonds has been fixed at 2.25 per cent and for the long term bonds is 2.5 per cent for the bonds issued in 2015-16. 

The final verdict on the subject is still to come and experts are equally divided between the two positions. While some experts feel that with innovative scheme from the government and lowering of limit to 30gms (earlier it was 500gms), it should be able to get hold of most of the household gold. 

View from the industry: 

Anantha Padmanabhan, Southern region head of the All India Gems and Jewellery Trade Federation told Reuters: 

"The present scheme will not bring out even 20 tonnes of gold. The reason is because investors fear that the tax department will hound them questioning the source of gold. The government should have launched an amnesty for people to deposit up to 500 grams of gold without any questions.”