Impact on the economy

Mann Ki Baat : Green of Gold

The Gold Monetisation Scheme mentioned by PM Modi in Mann Ki Baat has objectives that are very crucial to Bharat’s development and economy with the potential to have substantial savings for both the government and the people.

Bharat shares a special relationship with the precious yellow metal- Gold, enjoyed both as an adornment and investment. Its possession is viewed as a statement of prosperity and remains an important part of the socio-economic ethos of the Bharateeya household. It invokes a sense of cultural and sentimental attachment, making its consumption and investment in Bharat very different from that of other countries. In Bharat, gold has, through generations, remained an obvious and natural choice of saving of all households. Our temples too are endowed with an enormous treasury of gold, offered by devotees in form of bars and gold coins.
This affinity for gold has resulted in Bharateeya households possessing over 22,000 tonnes of the metal. For this year itself, the import of gold is estimated around 900 tonnes. For the government this results into a huge current account deficit and brings into the economy an investment which remains idle. This is particularly because of the high sentimental attachment people have with gold. Currently Bharat is the world’s largest importer of gold and gold comes second in Bharat’s import bill right after crude oil. The challenge for the government lies in creating a policy to reap the maximum benefit of the high affinity for gold in Bharat through a channel to mobilise this ‘idle’ asset locked in the Bharateeya household and reduce reliance on foreign imports of gold.

Gold Monetisation Scheme
In 2015-16 Budget, Finance Minister Shri Arun Jaitley announced a Gold Monetisation Scheme aimed to revolutionise Bharat’s gold market. Through this Gold Monetisation Scheme, people will be incentivised by depositing their gold into banks which pay them interest on it.
The move aimed to bring over 22,000 tonnes of gold into the market. RBI recently issued guidelines for gold monetisation scheme to different banks after getting the approval from the government in September 2015. The scheme intends to replace the 1999 gold deposit scheme and  gold metal loan scheme but it has
drastically cut the minimum quantity of gold. Recently through Mann ki Baat, Prime Minister Narendra
Modi stressed on how important it is to make gold an economic strength in today’s times.
Here are some basic facts about this scheme

• Gold deposited will be in form of bar or coins. If jewellery is deposited it will be melted and equivalent amount of gold will be considered
• Banks will award an interest rate for depositing gold which should be minimum 30 gms
• It can be a short term, medium term or a long term deposit
• Banks are free to decide on the interest rate they wish to offer
• The scheme will have triple tax exemptions- Capital Gains Tax, Wealth tax and Income Tax

As we can see people will have to deposit their gold which is in form of bars or coins. Currently it’s estimated that 61 per cent of Bharateeya gold is in form of jewellery which falls out from this scheme as it is not realistic to expect them to melt their jewellery to expect interest payments. However, even 39 per cent forms a huge reserve of gold enough to ensure the success of this scheme and its objectives. Also it aims to provide the people with a higher security for one of their most prized assets by depositing it within the bank and earning from them.
RBI decided that banks will be deciding the interest rates. Interest rates offered will be one of the biggest factors for the success of this scheme. Still, there is ambiguity in terms of the exact interest rates that would be offered by the banks but the expectation is around 1-4 per cent. Now there are 2 sides to this. Letting the banks decide the rate was to create competition, however we have seen in recent times that banks have mutually colluded to not drop borrowing interest rates by a significant amount despite RBI cutting the REPO rate substantially.
Although the government has reduced the limit for minimum deposit of gold but they haven’t kept a ceiling on the maximum level of deposits acceptable without disclosing information of the sources of the income. Black money has been a long standing issue in our country and a lot of these deposits are in the form of gold. One of the biggest challenges for the government will be to avoid the conversion of this gold possessed by some as black money to white money. This will also be a deterrent for the common public to invest in this scheme as the feel they might attract unwarranted attraction towards the source of their finances.
Thus the scheme has objectives that are very crucial to Bharat’s development and economy with the potential to have substantial savings for both the government and the people of the country. However, it will be interesting to see how the government tackles the problem of managing black money and ensuring this scheme appeals to the mass to mobilise their most cherished prized asset. This scheme will also be dependent on the rates banks are willing to offer for gold deposits and the information they need investors to divulge at the time of depositing their gold.  

Prof  Gourav Vallabh  (The writer is a Professor of Finance, XLRI Jamshedpur)