India’s gold demand is met mainly by import which is about 800-1,000 metric tonne (mt) annually and it contributes about 7% of the total import bill. As a result of such high level of import backed by strong gold demand due to religious, social and economic factors, it has resulted into the accumulation of more than 20,000 mt of gold in the economy, which lies idle with the consumers and institutions like temples.
In this scenario, the government introduced the “Gold Monetisation Scheme” in 2015. The objective of GMS is to mobilise idle gold held by households and institutions and put this gold to productive use. The hope was it could have a multiplier impact on the economy and foreign exchange reserves.
But the performance of this scheme is not very encouraging and total gold deposit under GMS is just about 20 mt of gold. Therefore, sometimes people suggest that gold monetisation is not practical/feasible due to socio-religious factors associated with gold demand.
Under GMS, one can open Gold Savings Account in designated banks and deposit physical gold via BIS-certified collection, purity testing centres (CPTCs). The gold is deposited for Short Term Bank Deposit (STBD:1-3 years), medium-term (5-7 years) long term government deposits (MLTGD 12-15 years).
It must be pointed out here that the deposits of gold, under the MLTGD plan, are accepted by the banks on behalf of the Central government. For collection under MLTGD, the Central government pays the handling charges (1.5% of the gold deposit amount) and commission - 1% of the gold deposit amount - to the banks to cover the cost associated with gold deposits and ensure their meaningful involvement.
The gold thus collected is sent to refineries and banks which can have tripartite/bipartite agreements with refineries and CPTCs. On maturity, one can get back the cash/physical gold and can also earn interest on gold deposits (2.25% for medium-term, 2.5% for the long term). This structure suffers from issues which are responsible for the poor performance under GMS. These issues are as follows:
a. GMS is targeting only the stock of gold and ignores the flow of gold in the form of imports (around 800-1,000 mt annually).
b. The classification of GMS into STBD and MLTGD is not logical. It merely reveals the government’s desire to deposit gold for the long term. But such a classification has resulted in some costs which could have been avoided while achieving the same objective if alternative classifications had been adopted.
c. The credibility of CPTCs is ignored (the entire structure of GMS is based on the tripartite agreement among banks, refiner and CPTC). However, due to the low net worth of CPTCs, the credibility of CPTC remains an issue. Therefore, CPTCs are not functional de facto and it ensures minimum retail participation.
d. The present structure focuses more on the ‘deposit of gold,’ and it seems that ‘utilisation of gold’ aspect is treated as taken for granted - it rests on Say’s Law that underscores that if there is supply, then there will be demand, suggesting lack of wholesome planning for the success of GMS.
e. The intention behind the GMS is to motivate individuals to deposit their gold but at the same time, this process adopted under the GMS assumes that the government/banks will be in the best position to decide what the depositor wants from their deposit. Therefore, this scheme does not allow the depositor to behave in a rational way and hence the scheme has remained unable to persuade individuals to deposit their gold. As a result, the entire scheme has become more process-oriented while overlooking the core of the monetisation aspects.
f. The demand preferences and gold buying behaviour of the households and the institutions have differences and distinct characters. Thus, a different strategy is required for households and different types of institutions in a more focussed manner.
g. It inadequately addresses the `fear factor’ among gold depositors. GMS should link the ability to gold purchase and ability to pay, and then should provide exemption limit accordingly.
h. GMS should be seen as initial steps towards bullion banking and therefore, should create an ecosystem of the bullion banking system. Many standard operating mechanisms and levers like repo or reverse repo kind of system (which are missing in the present structure) can be applied to cover some part of the loss incurred by banks/depositors due to systematic failure or to regulate the gold market.
i. The efforts and progress made under GMS do not seem to be part of any medium or long-term vision linked with the financial system or macroeconomic management of the economy.
Additional thrust
To summarise, the poor performance of GMS is not a reflection of its potential; rather, it indicates that the scheme requires additional thrust and willingness towards reforming its design, structure, strategy, planning, execution and monitoring.
GMS, which can not only reduce the import bills on a sustainable basis, can also encourage the deepening of financial markets, monetisation of gold and making gold into an asset class.
At a time when the country has been facing economic slowdown and uncertainty in banking and non-banking financial sectors, it is high time for reforms and innovative amendments in the GMS to make gold monetisation more lucrative for the target customers that ranges from households, religious institutions, private institutions, importers and market players, incorporating suggestions from the industry and other significant stakeholders. The role of GMS can be instrumental towards the vision of ‘New India’ and achieving the goal of $5 trillion economy.
(Raj Kumar is Deputy Director, Ministry of Electronics and IT; Arjun Kumar is Director of Impact and Policy Research Institute, New Delhi)