Centre launches Gold schemes

The centre launched the following gold schemes recently:

Gold Monetisation Scheme (GMS)

• Under the GMS, resident Indians can deposit gold at collection and purity testing centres certified by the Bureau of Indian Standards.
• The resident Indians are classified as individuals, Hindu Undivided Families, Trusts including Sebi-registered Mutual Funds and Exchange Traded Funds
• The deposit certificates will be issued by banks in equivalence of 995 fineness of gold
• The principal and interest of the deposit under the scheme will be denominated in gold.
• The terms of deposit range from short-term deposits (1-3 years), medium-term deposits (5-7 years) and long-term deposits (12-15 years).
• Depositors will be allowed to prematurely withdraw their deposits subject to a minimum lock-in period and a penalty that is to be determined by each authorised bank.
• The minimum deposit at any one time shall be raw gold equivalent to 30 grams of gold of 995 fineness.
• There is no maximum limit for deposit under the scheme
• The designated banks may sell or lend the gold for minting India Gold Coins and to jewellers, or sell it to other designated banks participating in GMS
• The scheme will replace the existing Gold Deposit Scheme, 1999. However, the government has made clear that deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them.
• However, attracting interest in the scheme will not be easy. Overcoming the sentimental approach of the public towards their gold belongings is the key factor that determines the success of the scheme

Sovereign Gold Bonds

gold schemes

• The Government on Friday announced that it will issue Sovereign Gold Bonds  on November 26
• Proposed Sovereign Gold Bonds (SGBs) is part of government’s budget proposal along with Gold Monetisation Scheme (GMS)
• While GMS proposes to ‘monetize’ India’s massive stock of physical gold, SGBs intend to convert the investment demand for physical gold into paper demand
• The government also said that the price of the bonds will be set in rupees, based on the previous week’s average closing price of gold published by the India Bullion and Jewellers Association.
• The bonds can be used as collateral for loans
• The borrowing through issuance of the Bond will form part of market borrowing programme of Government of India

Gold Coin and Bullion Scheme

• These are the first ever national gold coins
• The government will issue gold coins which will have the Ashok Chakra engraved on them.
• Initially, coins of 5 grams and 10 grams will be available, soon to be followed by a 20 gram bar.
• The government will make available 15,000 coins of 5 gm, 20,000 coins of 10 gm and 3,750 gold bars.
• These are unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy re-cycling,

Significance

• The gold schemes are a step in the right direction. It would allow for the channelisation of the unutilised domestic gold reserves towards supporting the country’s economic growth. The past few years have witnessed an exponential increase in gold imports exerting tremendous pressure on our current account. With the schemes being rolled out we should be able to reduce our gold imports,
• India imports a staggering 1,000 tonnes of gold every year, draining out foreign exchange and putting pressure on the fiscal deficit. An estimated 20,000 tonnes of gold worth over Rs. 52 lakh crore is lying with households and temples

Issues

• The gold monetisation scheme is no doubt an improvement over earlier scheme — it promises higher interest rate and retains the promise of returning the deposit as gold subject to certain conditions.
• However, gold held as jewellery will be very difficult to be monetised. There would be a sentimental objection to parting with jewellery, which in many households are passed on from one generation to another. In fact, no gold monetisation scheme can overcome the inhibitions of all would-be investors.
• People buy gold with different motivations. Pledging gold to meet seasonal requirements is very common. Many gold loan companies have grown exponentially recently, especially in Kerala. Whether the loan is taken from an NBFC or a money lender, the gold pledged can be redeemed in its original form and not melted away at the instance of a bank.
• Despite much greater clarity in the operational aspects, it is obvious that the infrastructure for operationising a monetising scheme should be built up in a way that promotes efficiency as well as transparency.
• There is high hopes that temples and other religious institutions who are large repositories of gold will invest in the monetisation scheme. The move will be controversial. There will always be a suspicion that politicians will get into the act.
• Moreover, religious traditions built up over centuries might have to reinterpreted in some cases. A better alternative to persuade the temples to convert a portion of their gold stock into coins, pendants and so on bearing the stamp of the presiding deity. This has already been tried out but from the point of bringing gold into mainstream financial sector has little relevance.

Further steps required to make gold schemes a success

• Creation of a strong infrastructure
• Standardisation of price and quality
• Establishment of a Gold Board will help the following

1. better management of gold imports,
2. encourage exports,
3. facilitate infrastructure development and
4. would ensure that India’s gold market functions effectively

Changes in the gold monetization scheme

• The ministry has recently fine-tuned the gold monetization scheme to get better response from those holding stocks of gold.
• It had met the representatives of the gems and jewellery industry associations to seek their views on making the monetisation scheme attractive.
• Following that, the ministry has allowed more than 13,000 BIS licensed jewellers to act as a Collection and Purity Testing Centres (CPTCs), provided they have a tie-up with BIS’s certified refiners
• So the depositors to give their gold directly to the refiner without involving the collection and purity testing centres wherever it is acceptable to the banks.
• This will encourage the bulk depositors like HUFs and institutions to participate in the scheme