Massive overhaul in the works as gold monetisation schemes lose sheen; fresh rules expected soon

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October 3, 2020 8:00 AM

These financial products will be integrated into banks’ core banking solution and the regulator (RBI) will issue necessary directives for the purpose.

The annual interest rate on gold parked with banks under existing GMS is up to 2.5% (which varies depending on the tenure of deposits).The annual interest rate on gold parked with banks under existing GMS is up to 2.5% (which varies depending on the tenure of deposits).

The government has garnered only 21 tonnes of gold and its equivalent through the monetisation scheme in over four years before Covid-19 struck. This has prompted it to weigh a clutch of amendments to overhaul the extant policy to induce a large number of people to park their idle holdings with banks.

Though the bond programme has witnessed a higher mop-up (about 30 tonne worth gold up to February) than the monetisation scheme since both were launched in November 2015, even their combined collection represents less than 2% of the country’s consumption during this period.

As part of the government’s plans, people will be allowed to open a gold savings account with a deposit of the precious metal worth just Rs 500. This is markedly lower than the current minimum threshold of 30 g (worth about Rs 1.5 lakh) under the gold monetisation scheme (GMS).

The gold account will be clubbed with an existing bank savings account. Further deposits into the gold account will be allowed in increments of gold worth only Rs 100, so that even the poorest of the poor can also take advantage of the scheme.

People depositing gold up to about 100 g each won’t be asked any question by the taxman.

The deposits won’t be subject to any GST, capital gains and wealth taxes. Interest earned on them will be exempted from income tax as well, according to the proposed changes.

The annual interest rate on gold parked with banks under existing GMS is up to 2.5% (which varies depending on the tenure of deposits).

Similarly, the government is also considering making it mandatory for at least state-run banks to roll out the GMS. Currently, only 9 banks and their 240 branches have launched the scheme, while the country has a total of about 80 commercial banks with 1,28,723 branches.

These financial products will be integrated into banks’ core banking solution and the regulator (RBI) will issue necessary directives for the purpose. Banks could be free to fix interest rates on these products, instead of the government fixing the rates.

The gold schemes (monetisation, bonds and sovereign coins) were unveiled to reduce the country’s reliance on the import of the precious metal and curb its debilitating impact on current account deficit. While the gold monetisation scheme is aimed at tapping household stocks, through gold bonds, the government wants to wean away investors from the purchases of the physical metal to “paper gold”.

However, a limited number of collection and purity testing centres (and their lack of desired efficiency), more so in rural areas, and the unwillingness of housewives to get jewellery having emotional appeal melted so that these can be deposited have dented the appeal of the gold monetisation scheme. With renewed push, though, the mop-up under the monetisation scheme can go up, analysts said.

Since gold already attracts a 12.5% basic customs duty, any move to raise it further to discourage imports is fraught with risks of higher smuggling. So, the government wants to further enhance the appeal of its monetisation scheme by revising some of its current features.

Nevertheless, the current monetisation scheme has witnessed a marked improvement upon an earlier one under which the government had garnered only two tonnes of gold between 1999 and 2015.

Indian households, together the world’s largest hoarders of gold, are estimated to have piled up a record 24,000-25,000 tonnes of the precious metal, worth over $1.3 trillion.

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