The gold monetisation scheme (GMS), unique in its characteristics and launched for the first time in India, has not been successful. The GMS, including sovereign gold bond (SGB) schemes, has, in two tranches, mobilised approximately 3.7 tonnes of gold from about 3.8 lakh applicants. The response is tepid and mobilisation seems minuscule compared to the nearly 1,000 tonnes that the country imports annually, and holds a stock of nearly 21,000 tonnes. The reasons for the lacklustre response of GMS are manifold and vary from structural issues, and deficiencies in design and dynamics related to economics of gold consumption in India. The reasons need to be contextualised in structural disadvantage where gold is perceived to be more useful than any other asset, as it can be simultaneously used to indicate social status, stored, transferred inter-generationally and, increasingly, even pledged.
Gold purchases, especially in jewellery format, have immense everyday cultural connotations, which limit the attraction of GMS. There is a sentimental attachment to gold ownership, depending on reasons for which it was acquired, like marriages, birth of a child or inheritance. This implies that people could be unwilling to convert gold in their possession to any other financial form. In recent years, investments in gold have attained an incredible amount of liquidity, thanks to the increased opportunities to pledge it as collateral when and where required. A few years of continuously rising price (2009-13) added to this lustre.
During the past few years, gold buying was driven by three important factors, amongst others. One, with high growth rate of the economy, for parking quick money or even unaccounted for money. Two, hedging against uncertainty and inflation. Three, purchasing gold for speculative purposes in view of rising gold prices. In addition, there was a premium over existing market prices for 1 kg gold ‘brick’. In contrast, the current structure of GMS and SGB means that it is difficult for gold purchased with unaccounted money to ever become part of official economy, since it invariably leads to questions about how the gold was acquired? Hence, the challenge would be how to encourage such gold to be offered under GMS.
The GMS design has to examine the rate of interest being offered as well as the lock-in period. Bonds can be made more attractive by linking the tenor with interest rates, more dynamically. This will make it attractive for high net-worth investors and money managers who may be interested in taking calculated risk on price while earning additional returns.
On GMS, the need is to actively extend the campaign to households—away from the focus on temple trusts—maybe through the use of vernacular press and electronic media. Also, from the market, the feedback on the scheme suggests that there are problems with collection and assessment of value, as only about 54 assayers in 30 cities are recognised. To make the scheme market-friendly, assaying could also be assigned to select jewellers, especially branded chains, to ensure presence in at least all districts. Finally, to incentivise collection of gold, the commission that is being offered to commercial banks—2.5% including handling charges—could also be offered to select jewellers.
On SGB, there is a need to facilitate purchases throughout the year rather than adopt a window approach only for a few days. SGB schemes have to compete with National Savings Certificates or bank deposits, in terms of ease of transaction and denominations. In other words, success of the SGB hinges on its ability to become a financial instrument that is as easy to invest, encash or transact. Another way to make it easy to invest is to offer a systematic investment plan (SIP), like mutual fund units. This is important because empirical evidence indicates that gold is bought by a large number of people in small quantities, often less than 5 gm, per month, in India. Further, marketing of the SGB as a financial instrument rather than a commodity is a limiting factor because the number of Indians who invest in securities market is less than 1%. In contrast, the number of people who own at least some quantity of gold consists of an overwhelming part of national households. Further, SGB could also be marketed as a giftable item, in small denominations. Availability of SGB schemes needs to be widened and a network of post offices as well as jewellers, especially branded chains, could be considered.
In addition, there are some larger issues, like terms of taxation of income and capital gains, for which the markets are not yet clear about the provisions. Finally, and most importantly, it is necessary to undertake household-level surveys to determine the attitude of households towards gold in different parts of India, and then focus on a strategy to collect gold under the GMS.
Ananth is an independent researcher based in Vijayawada. Singh is RBI Chair Professor of Economics at IIM Bangalore. Views are personal