India’s Gold Schemes

India’s Gold Schemes

India sits on over 20,000 tons of idle gold. The Indian government has come out with three new gold schemes, the combined purposes of which are to reduce India’s gold imports and bring maximum gold lying idle with individuals and households in India into the economy.
These objectives are important. India imported Rs. 2.1 lakh crore worth of gold in the financial year 2014-15. The idea is to narrow India’s Current Account Deficit (CAD). The need for these policies is undeniable. How successful these policies are, only time will tell!

Purpose of Policies

India has a Current Account Deficit (CAD). Petroleum accounts for about 34% of imports and gold and silver about 12% of imports.

  • CAD: When the value of total imports is more than the total exports a country has a CAD. To some extent a CAD is good for a developing economy, like India, because corporate borrowing from abroad is expected to lead to growth in business and economic activity and enhancement of GDP. Imports which do not contribute to economic growth but only meet the demands of domestic consumption are harmful for the economy. Some of the major harmful effects of CAD on Indian economy are:
    • Currency depreciation.
    • Inflation.
    • Reduction in credit rating of the country.

This is not the first time that the government has looked at gold as a means of controlling the CAD. It has periodically sought to limit gold imports by increasing the import duty, but these moves have met with limited success.

Indians’ Love for Yellow Metal

Indians love gold because of the following reasons:

  • Cultural reasons like festivals, weddings, offerings to Gods, etc.
  • Gold offers security and is an equivalent of hard cash, with expectation of rise in value over time. Over the past 5 years it has given 20% return on investment.
  • Gold is a status symbol.
  • Gold jewellery has never got out of fashion.

Three Schemes

The recently launched schemes are:

  1. Gold Monetization Scheme. Customers can deposit gold & earn 2.5% interest per year on it. Minimum quantity is 30 g, with no upper limit.
  2. Sovereign Gold Bond Scheme. In this scheme customers can buy gold bonds- minimum of 2 g and maximum of 500 g for a period of 8 years, with option to exit after 5th, 6th, or 7th The bonds are tradable like gold & yield 2.75% annual interest.
  3. Gold Coins of 5 g  and 10 g with Ashok Chakra will be sold to customers. This scheme has no economic benefits for India and is of only symbolic value.

Gold Schemes: Prognosis

Impediments to the success of these schemes are:

  • It is unlikely that temple trusts will opt to deposit gold with banks for cultural reasons.
  • No lady will like to part with her jewellery as designed with stones, etc, because after deposition only equivalent value of gold or money can be obtained.
  • Unaccounted gold (part of black economy) cannot be attracted by any scheme.

These schemes are good and need a lot of promotion. As Indian society modernises these schemes are expected to prove beneficial in the long run, if not the short run.
 
 
 

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