Although banks engage in gold imports, metal loans and selling of gold coins, their clientèle in such businesses are not the target audience for the GMS, i.e. retail jewellery sellers/buyers.
By V Shunmugam & Tulsi Lingareddy
India’s dream of gold monetisation appears far-fetched even after three years of its introduction, with a meagre 15 tonnes, a fraction of the 25,000 tonnes of gold estimated to be available with the economic stakeholders of the country. The Gold Monetisation Scheme (GMS), introduced in November 2015 with an aim to mobilise domestic gold stocks, thereby reducing imports and foreign exchange outflows, has remained ineffective, and gold imports have continued to rise at more than 2% on a CAGR basis over the five years ending FY19, and thus continuing to add to the current account deficit.
The efforts of the government to reduce the burden of gold imports and contain foreign currency outflows started as early as in the 1960s, with the implementation of the Gold Control Act, 1962, which led to an era of licensing and import restrictions hindering healthy and transparent development of gold markets in the country; the Act was eventually abolished in June 1990.
Nevertheless, following the liberalisation of the Indian economy in the early 1990s, and subsequent currency pressures, the government introduced the Gold Deposit Scheme (GDS) in 1999. The GDS didn’t receive very encouraging response due to inherent problems such as restriction on entry at a minimum deposit of 500 grams, very low interest rates, etc. The lack of infrastructure for recycling and for testing the purity of the gold mobilised through the scheme, apart from the high costs of recycling, also hindered the ability of the scheme to attract more gold. Besides addressing the issue of high gold imports and hence its impact on the current account deficit through the GDS, the turn of the century also warranted the need to monetise gold investment into financial markets, especially given the volatility of foreign fund flows in India. Given this, the revamped GMS was introduced in November 2015, with a minimum deposit of 30 grams, and in short-term (1-3 years), medium-term (5-7 years) and long-term (12-15 years) maturities.
To make the GMS attractive to depositors, the gains from the scheme in terms of interest (2.25-2.5%) as well as capital gains are currently exempted from any tax liabilities. Further, recent regulations facilitated setting up of 49 certified collection and purity testing centres (CPTCs) and 23 refineries licensed by the Bureau of Indian Standards (BIS) as on date—in an effort to overcome the constraints of the GDS (the early avatar of the GMS). However, even these facilitations did not succeed in attracting substantial participation from both the individuals, and religious trusts and endowment boards.
The challenge from an individual investor perspective comes in two ways. One, the preference for having gold in the form of jewellery rather than bars/coins that reduces transparency in repurchases; two, the less attractive returns from gold deposit. The average annual returns during the past three years on gold stood close to 8%, and even after adding 2.25-2.5% interest, the maximum gains stood at 10.5%, against an average of 12% returns from stock markets. On the other hand, monetising temple gold is challenged primarily by religious sentiments and lack of awareness, as only a few temples have participated in the scheme so far. Moreover, awareness of the scheme is still far from the desired levels, and even access to the scheme needs a major push. Only a few banks and those too through limited designated branches are currently offering GMS services. Couple this with just 49 CPTCs across the country, which are certainly not enough, especially for a high-value commodity such as gold, given the huge security risk in transportation. Unless the process of gold collection and deposit is made effortless, there will not be any incentive for customers of the scheme to draw significant inflows.
In this regard, keeping in mind the proposed mandatory hallmarking for sale of jewellery and the associated BIS-licensed jewellers network, banks should be encouraged to join hands with them, laying a transparent and trustworthy process for jewellery collection and deposit, in addition to the collection of the account opening form to complete the necessary KYC process. While this will provide necessary incentives in terms of service fees, it will also encourage jewellers to market this scheme among their large customer base and provide for effective recycling of gold jewellery, if not in the long-term account, then at least in short-term accounts. In addition, it will increase the access of the large network of licensed jewellers to the gold lending and borrowing markets, making good of any anticipated price movements and to maintain healthy business margins.
Banks will have to be provided appropriate incentives to get them to market the scheme to its potential customer base. Interest subvention (given the relatively high cost of gold mobilisation versus metal loan rates) or allowing gold to be part of the CRR (like in the case of Turkey’s successful efforts towards gold mobilisation) or even permitting banks to engage third parties such as jewellers in their outreach activities for the GMS need to be implemented to scale up its reach from the current levels. In the current GMS structure, wholehearted participation of commercial banks is critical for the success of the scheme. Moreover, allowing banks to hedge their gold price risk (arising out of short-term gold deposit under the GMS) in domestic exchanges would help them do away with the need for separate forex hedge as well as stay protected against varying premium/discounts of domestic market and any changes in the customs duty structure.
Although banks engage in various gold activities such as gold imports, metal loan, selling of gold coins, etc, their clientèle in such businesses are not the target audience for the GMS, i.e. retail jewellery sellers/buyers. Instead, jewellers with their far and wide presence across the country, better wherewithal in dealing in gold as well as trusted relationship with end-consumers can be cost-effectively roped into the GMS structure. At the same time, the physical movement of gold in the hands of the consumer in the current manner in which the GMS operates can be minimised and leveraged upon through forging of an effective commercial network between jewellers and other infrastructure providers. Finally, involvement of jewellers in the scheme will help in eliminating the negative vibes around the GMS, as they start marketing it.
Another challenge to the growth of the GMS on the retail side will arise from the fact that a large part of investments in gold happen through informal markets in an unaccounted manner. Given that the nation is interested in bringing to formal books the informal investments made in gold, the GMS with appropriate tax incentives will prove to be a great way for the unaccounted money invested in gold to be formalised. The success of gold monetisation in India, therefore, largely depends on effectively addressing such challenges with suitable policy and fiscal measures. Last but not the least, it’s important to build adequate world-class infrastructure facilities for assaying, testing and refining the monetised gold, assuring a given quality standard and thereby bringing trust and transparency amongst all the value chain stakeholders. This will put India’s gold monetisation aspirations onto the desired path.
Authors are head, Research, and senior analyst, respectively, at MCX. Views are personal