Gold monetisation as an idea was pursued seriously when the rupee hit an all-time high of 68 to the dollar in 2013.
This was the time when India's Current Account Deficit (CAD) shot through the roof. As a result gold imports were targeted as they were seen as a huge burden on the CAD.
Among the measures rolled out by the newly-sworn-in RBI governor Raghuram Rajan to tackle the ballooning CAD was the introducion of a 80:20 scheme for gold imports, wherein 20% of gold imported had to be compulsorily exported back.
Another scheme proposed and introduced then targetted the idle gold holdings of households and our wealthy temple trusts.
But according to estimates by the World Gold Council (WGC) only 15-20 tonnes of gold has been mobilised under that gold monetisation scheme till date. While the old scheme targeted people with relatively large holdings of gold, the proposed new scheme by Finance Minister Arun Jaitley will aim to help people with smaller holdings of gold to also monetise their assets.
It is significant in the light of WGC estimates of about 22000 tonnes of gold still lying idle in Indian households.
The new scheme, in essence, contains two proposals to monetise this large reserve of gold.
1. Asking people to deposit their gold in metal accounts and earn an interest on it – with withdrawals allowed after a fixed period.
2. Selling Sovereign Gold Bonds that are linked to the value of gold and that shall be redeemable for the value of gold.
The first one is a plain and simple scheme, where an interest will be paid at the end of the tenure. My own personal guess is that the interest could be somewhere between 0.75%-1.5%. At the end of the maturity period, the investor will earn an interest irrespective of the direction in which gold prices have moved. This scheme is aimed at investors who already have a long-term view and are holding gold idly.
The second one is a bit more complex. Since the Sovereign Gold bonds can be linked to the value of gold, they could get listed on any exchange and market participants could be allowed to purchase and sell these bonds.
In this case it is more like punting on the direction the gold prices will take. But it saves the speculators/investors seeking a return the trouble of actually buying/importing gold and keeping it safe.
The big hitch the government could, however, encounter is the fact that the majority of the gold present in Indian households is in the form of jewellery. It is unlikely that these buyers will be willing to monetise it.
The consistent returns that gold had given in the last decade had also led many investors to diversify a part of their portfolio into gold - by investing in gold bars and coins. Even if 10-30% of these gold bars and coins are mobilised under the proposed gold-deposit scheme, it could bring close to in $50-100 billion into the mainstream financial system.
But even here, the biggest challenge the government will face could be to get investors to monetise the gold at the risk of being caught under the tax net. After all, the sobering fact is that most investments in gold in India are typically made using cash to avoid taxes.
The new Gold Monetisation Scheme, whose guidelines are expected to be announced in May, will replace both the present Gold Deposit and Gold Metal Loan schemes. It will also help the jewelers to obtain loans against their metal account. Banks/other dealers will also be able to monetise this gold.
To instil some confidence in the mind of the depositor, RBI could also end up putting up a CRR (Cash Reserve Ratio) requirement on these deposits. There is a precedent for this in other countries as well.
It should also help the RBI add to their existing reserves of 550 tonnes.
I personally feel the government's best chance of success with the scheme will be with the genuine portfolio investor, who has diversified into gold and does not get a return unlike in the case of stocks and fixed-income instruments, where a dividend and fixed interest rate is gained.
Such investments made in gold ETFs and bars and coins sourced after disclosing incomes is likely to find its way into the gold monetising scheme. However, in our assessment that could only be close to $15-25 billion approximately.
Therefore, though, on paper the scheme seems like a game changer capable of mobilising the huge stock of idle gold into the monetary system, the challenges before the government are far too many.
Indeed, the success of the scheme could well depend on whether the finance minister is willing to overlook the source of income with which the gold to be monetised was purchased.
Gnanasekar Thiagarajan is a Director at Commtrendz Research and a consultant to commodity bourses and corporations both in India and the overseas. He has more than 20 years of experience in commodity and forex trading and was formerly a forex dealer with the Bank of Nova Scotia.
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