Gold Monetization Scheme: The bigger perspective

November 24, 2021 2:36 PM

The Gold Monetization Scheme could be indeed a game changer. This is an opportune time for implementing such financial innovation.

Idle gold must be gainfully leveraged by India for meeting its investment needs and putting India on the high growth track.

Since several centuries, the intrinsic value of gold was recognized. Hence, many countries followed gold standard for the valuation of their currencies and guaranteed that; on demand, they shall pay their currency value in shape of gold. After great depression in 1930-33, there was reluctance in accepting the currency of other nations due to mismatch of “reserve gold stock” with their Central Banks. Hence, the international trade and financial transactions were severely affected. In 1944, about 44 leading nations entered into “Bretton wood Agreement”. By that time, the Central Bank of USA was holding largest stock of gold. Hence, US Dollar was accepted as a global currency. Thereafter, the US economy prospered and finally in 1971, this agreement became inoperative. But the US Dollar still enjoys the status of dominant global currency. Now also, it is holding highest reserve stock of about 8000 tons of gold.

Currently, the Reserve Bank of India (RBI) is holding about 660 tons of gold in its forex kitty. But Indian public and religious trusts hold more than 25000 tons of gold, which is highest in the world. Out of which the idle gold in shape of bars, coins and un-usable jewellery might exceed 10,000 tons. Such idle gold must be gainfully leveraged by India for meeting its investment needs and putting India on the high growth track. In the process, the interest of depositors must be fully protected.

In 2015, India implemented Gold Monetization Scheme (GMS), which could not succeed. It is not so viable for the government due to inflation in the gold price; that must be resolved. It should also motivate depositors and protect them from the probable tax hazards. Its objectives must also be expanded for giving significant push to the economy, as discussed in the book,“Turn Around India-2020”.

Prime objectives should be pushing India to high growth trajectory. For this, India needs cheaper funds for investing into infrastructure and other capital assets. While adding deposited gold into forex kitty, the rupee shall appreciate and the sovereign rating shall also improve. That will attract cheaper global funds. Another objective should be reducing gold import by selling and lending a part of the deposited gold to jewellers. The sale proceeds will also provide cheaper funds to the government. Eventually, this will reduce trade deficit and directly add to GDP.

For achieving aforesaid objectives, the scheme needs radical changes in a single go instead of piece meal amendments. The key strategy should be: the deposit of gold may be accepted as a part of forex kitty and the “Gold Deposit Certificate” (GDC) may be issued on behalf of the RBI by banks. GDC from the RBI shall provide high security and comfort to gold depositors. The predictable and friendlier tax, as suggested in the book, is an essential pre-requisite for the success of scheme.

These GDC should be tradable and transferable. The trading of GDC must be integrated with stock exchange and be converted to a “liquid security paper”. By this, the demand of gold by investors, about 250-300 tons per year, shall be met through “Paper gold” (GDC) and the import shall reduce to that extent within 1-2 years.

For meeting balance consumption demand, the RBI may sell part of deposited gold through designated agencies. Some quantity of gold can be given as a loan to banks for onwards lending to jewellers. The sale proceeds may be lent to the government at repo rates. By this, the SLR obligation of banks shall reduce and bank credits shall expand pushing GDP. Overall lending rate shall also soften; that will benefit the entire economy.

With a combination of selling and lending of gold, entire demand shall be met from the deposited gold and the import shall reduce to almost nil in 2-3 years. By this, the trade deficit shall reduce by about 2.1% of GDP which shall directly add to GDP.

As a crucial strategy, unsold stock of gold, being the most dependable international currency, may be treated as a part of forex reserves. Unsold gold stock shall be “international asset” against the “domestic liabilities” in the balance sheet of the RBI. By this, India will be with the surplus “international asset” and its sovereign rating shall take a leap. Eventually, that will appreciate the rupee.

By this, global funds shall flood into India at cheaper rates. That will meet investment needs of India and boost GDP. Thus, with a proper strategy, the benefits can be multiplied. Recent revamping of GMS-2015 is certainly a good step, but it needs major revamping to realize its full potential.

The RBI shall redeem GDC to GDC holder “on demand” basis in shape of physical gold only along with the accrued interest. Simple interest should be applied annually on the value during deposit. GDC will keep on changing hands and the redemption in shape of physical gold might be very low. Thus, the unsold stock shall always exceed 50% of the deposited gold. More so, the sizeable interest free funds shall be available with the RBI towards unpaid accrued interest.

Besides other suggestions, the issue of tax hazards is also addressed in the book within the existing frame-work which is crucial for the success of scheme. With proper incentives, India might receive 6000 tons of gold deposit in the next five years. That will boost GDP by 3.5-4.5% along with several other benefits, as estimated and quantified in the aforesaid book.

By and large, the scheme is designed for the productive usage of the idle gold (past physical savings) and the mobilization of foreign savings (global funds) at a cheaper cost for meeting investment needs of India. All stake-holders such as, depositors, RBI, Government, banks, jewellers and public shall be beneficiaries.

At this juncture, this scheme could be indeed a game changer. This is an opportune time for implementing such financial innovation. However, it is imperative to enact structural reforms boosting investment rate and making India globally competitive along with such financial innovation for delivering long-ranging benefits to the economy.

(By R P Gupta, Author, Turn Around India, Jan Andolan & Turn Around India-2020)

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