The gold monetisation scheme can succeed if policy reflects the original idea—to allow people to reclaim their gold on maturity
The BJP-led NDA regimes under the leadership of both Atal Bihari Vajpayee and Narendra Modi have sought to bring the huge amount of gold—estimated at 24,000-25,000 tonnes, with households and charitable and religious organisations in the country—into circulation. These are idle assets that earn no income for holders, but the country incurs a huge balance of payments burden due to import of this precious metal; imports in the first 10 months of this year were estimated at a whopping 762 tonnes. To mobilise this idle asset, the Union Budget for 1999-2000 proposed the Gold Deposit Scheme. Prime Minister Modi launched three gold-related initiatives in 2015, including the Gold Monetisation Scheme which replaced GDS (of 1999).
The desired outcomes of GDS and GMS, however, have been underwhelming. The government garnered only two tonnes of gold between 1999 and 2005. GMS witnessed a marked improvement by securing 21 tonnes over four years of its launch. The government is now exploring fresh proposals before it finalises its next set of changes to make the monetisation scheme work better, according to FE. This includes feasibility of exempting deposits made under GMS from the goods and services tax to make it more attractive. Currently, interest earned on gold deposits is exempt from capital gains tax, wealth tax and income tax. The annual interest is 2.5%, depending on the tenure of deposits. People wishing to deposit gold in banks up to 50-100 grams each may not be asked any question by the taxman.
GMS, and GDS before it, has not lived up to expectations; the original intent behind these schemes was not translated into the right incentives to enthuse citizens to deposit their gold with banks. The 1999-2000 Budget proposed that such depositors will receive interest bearing certificates or bonds, which on maturity can be reclaimed in gold. Unfortunately, that intention was not properly reflected in the policy. GMS did not improve matters as the rules stated that jewellery deposited in banks (after its purity has been ascertained) will be melted and converted into bullion or coins. However, due to the limited number of collection and purity testing centres, especially in rural India, and the unwillingness of housewives to get their jewellery melted, dampened the appeal of GMS.
GMS can be a game changer if the original idea behind the scheme—to allow people to reclaim their gold on maturity—is reflected in the policy. What if banks accept gold in unornamented form from depositors without limit for a minimum period of 3-10 years without attracting the attention of tax authorities? Banks should deposit 50% of their gold deposits with RBI and can sell the balance to raise resources for making advances.
Suppose banks accept 100 tonnes, half of which is sold. The sale proceeds of 50 tonnes and the interest on that will be more than the interest payable at 2.5% to depositors in GMS. The spread can be a source of recurring income for banks. The redemption of gold deposits can then be taken care of by accepting fresh deposits of unornamented gold. It represents a win-win situation for individual depositors, banks and economy as an idle asset enters circulation.