Gold monetization scheme

Gold monetization scheme (GMS): Gold is one such metal that fascinates every Indian woman. It could be the only property that many Indian women own. We have been a country of highest consumer of gold in the history before we gave it to China. But one thing that has not yet changed is India remains to be the largest importer of gold in the world.

The cultural and a sense of sentimental attachment of Indians with the yellow metal are so much that the gold has become an inextricable part of the Indian lives. And this same obsession has made it clear that the total amount of gold owned by Indian households is more than the combined amount of gold held by the US federal bank, China’s central bank. Despite having such a huge amount of gold, we still remain the largest importer of the gold contributing to the trade deficit to considerable extent. And to reduce the export of gold by bringing the yellow metal from households to mainstream economy, the government had initiated a scheme called “Gold monetization scheme” in the year 2015. This scheme is a replacement of the ‘Gold deposit scheme’ that has been active since 1999. Though it has its own merits and demerits, not many are aware of this scheme which prompted us write this post.

What is “Gold monetization scheme” (GMS)?

 A schematic approach brought in by the ministry of finance where an individual can open a gold savings account with the bank and deposit the gold he/she possesses for a fixed period of time; in return an interest is credited to the depositor at the rates applicable (2.25% to 2.5%).

How is interest credited?

Interest is credited to the account of depositor in the form of gold and the same can be redeemed on maturity of the deposit which depends on the kind of the plan one opts.

Will the ornaments be returned as they are at the time of maturity?

No, the prime objective of this scheme itself is to bring the idle gold reserves of the households and temples to the banks and the banks will assess the purity before issuing a certificate of deposit to the customer. Later the banks will send this gold (which is usually in the form of ornaments, coins) to the refineries. And the refineries will melt the gold to convert them into gold bricks. The banks will lend out these gold bricks to the jewelers who will repay the same along with the interest as per the terms therein.

What is the minimum deposit to be made?

30 grams of any purity is the minimum amount of gold to be deposited. And there is no maximum to limit for the deposit. And there are 3 plans available based on the maturity term of the deposit.

Deposit plans available:

  1. Short term: 1 to 3 years
  2. Medium term: 5 to 7 years
  3. Long term: 12 to 15 years

Interest rates:

  1. Short term: 0.5% p.a. for 1 year, 0.55% for 2 years, 0.60% for 3 years (State bank of India)
  2. Medium term: 2.25% p.a. for 5 to 7 years
  3. Long term: 2.5% p.a. for 12 to 15 years

Interest will credited annually on 31st March or Maturity date whichever is earlier

What is impact of this scheme on economy?

It is estimated that Indian households, temples and other institutions hold at least 20,000 tons of gold. The current market value of the same is a whopping 1.2 trillion USD which around 50% of India’s GDP. If a significant portion of these reserves is monetized and brought into the mainstream economy, we can see a staggering decline in gold imports. Reduction in the import of gold will result in availability of more money (essentially the forex reserves) which can be directed to invest on other sectors such as infra, agriculture etc. To put in simple terms, this scheme will boost the economy by monetizing the idle gold.

Merits of Gold monetization scheme:

  1. Boosts the economy by bringing down the trade deficit
  2. Increase in foreign exchange reserves as a result of decrease in the gold imports
  3. Availability of more money for investing in areas such as infra, healthcare, agriculture
  4. Individuals can earn interest on their idle gold reserves
  5. No need to pay the locker charges to the banks to safely store your gold. More safety, More returns at no cost.

Demerits of Gold monetization scheme:

  1. The cultural and emotional attachments of the Indian households make it not so attractive to participate in a scheme that involves melting the long preserved gold. After all, it could be the age old ornaments that have been passed on by one’s ancestors
  2. The huge amount of gold reserves held by the temples has an element of belief and tremendous faith of the devotees. Further the age old jewellery given by the kings over time has an inexplicable antique value. All these elements together make this scheme unattractive since it involves melting these ornaments.
  3. The chances of legalizing the gold acquired by paying out of black money are more. One can through his benamis may deposit the gold to convert into a legitimate wealth. After all how can the government question the ownership of the gold when you can reply by saying that it has been passed on by your ancestors.