Given that India’s total gold deposits could be worth well over R55 lakh crore, even at today’s lower prices of R27,253 per 10 grams, it is not surprising the government is once again trying to get this 20,000 tonnes or so into the financial system. Right now, most of this saving is not available for banks to lend against; were this to be possible, interest rates would fall, leading to more economic activity. And to the extent more hoarded gold is available with banks, this could also reduce import-demand from jewellery exporters—their demand could then be met from the gold that banks mobilise from the public. Indeed, the government tried to monetise the gold through the Gold Deposit Scheme of 1999, but this did not take off since interest rates were a mere 0.75% for a three-year deposit and the minimum deposit was a huge 500 grams. This time round, the minimum deposit has been sharply reduced to 30 grams while the government proposes to exempt interest on gold deposits from income tax, wealth tax and capital gains tax. Banks will decide on the rate of interest, though the discussion paper floated mentions a figure of 1%, albeit merely to illustrate a point.
Given that gold gives no returns unless its value appreciates, the monetisation scheme makes good sense. There are, of course, some caveats. For one, the scheme is unlikely to work for gold ornaments since making charges of 10-15% will be lost once the gold is melted. Estimates are anywhere between 20-30% of all gold could be in the form of coins/bars where there is no such loss. While exemption from taxation is a good step, investors may be wary of depositing gold since this will draw the taxman’s attention to them—though the rules state jewellers have to ask for PAN numbers when they sell gold, this is a norm observed more in the breach. In that sense, gold is bought because it has no KYC obligations, much like the Kisan Vikas Patras the government brought back—in case the scheme does not work out, the government may have to do some thinking on how to get around this issue. Also, it is not clear if a return of under 4-5% is attractive enough for people to want to deposit their gold with banks.
If the scheme manages to get even 1% of the gold stashed at homes every year, it means 200 tonnes of gold that does not have to be imported and foreign exchange savings of R60,000 crore (over $9.4 billion). Along with this scheme, the government also needs to look at the option of selling Kisan Vikas Patra-type gold bonds. So, if an investor wants to buy 100 grams of gold, she pays the then market value to the bank and gets a certificate for that amount. If the value of gold rises in the next year, this entitles her to get the higher value for 100 grams of gold along with the interest payment. Since no bank can possibly take a risk on the appreciation of gold, the bank will buy gold futures immediately, on international metal exchanges, if need be—in the case of the latter, the costs of hedging the rupee will also need to be factored in. For the scheme to work, the costs of buying options will have to be paid by someone, presumably the government—the reason why this might be worthwhile is that, to the extent it reduces the demand for physical gold, it reduces pressure on both the CAD as well as the rupee.