What is it all about? People of our country possess a huge amount of gold as we know India is the largest consumer of Gold. So this scheme deals with making the not utilized gold to be transformed into money or we can say it deals with the objective of making Gold productive. What is expected to happen under this scheme? People will bring their gold possessions to banks, deposit there and get interest. It is just like we get when we deposit cash in banks. It is at this point where gold is expected to be monetized. Estimated usefulness..!! A large amount of gold is blocked in every household. It will come before the government. As we know gold reserves of a country determine its wealthiness. Idle gold lying in people’s house in their almirah, vaults or even bank lockers are of no use unless they pay us something. People keep gold in bank lockers where they have to pay locker charge. But this scheme is really unique and will prove to be unique if implemented well…as instead of paying they will be getting something is return. A big question mark here…?? How far will it be successful?? A good thought indeed…it can make wonders in Indian economy..But there are always some flaws..There are many things yet to be revealed and those are on the edge to decide …For example:

• People in India think buying gold as an auspicious deed so there are less chances of parting from their ornaments.

• It is said that only raw gold will be accepted..But normally jewellery possessed is in 22carat..24 carat raw gold is a bit tough to find with households.

• People having emotional attachment with metals and that too gold..Will definitely think a hundred times before entering into such a scheme.

• The two options of return after maturity..In cash or in gold. According to the scheme, depositors of gold in bank have to opt for any one of the options right at the time of opening the gold account. So here it’s again a point of dilemma for a common man.

• A person having knowledge about financial economy and who can relate price of gold can still have some relaxation in mind that even I take my return in rupee terms it will not cause me any harm because gold is such an item whose price will definitely rise over a period.

• But a layman may think that it is risky to opt for any option right now as he may have a fear that I will be in a loss if price of gold at that time of maturity falls. And so there are chances of not coming up with any gold deposit.

• The mobilized gold might be loaned to jewelers by the banks, to make jewellery, in which case people won’t get back at maturity the same item which they deposited. This is again a problem with people having emotional attachment with their belongings.

• Now comes the question of Interest rates. As under the scheme it will be set by the banks but still it should be above 3% if at least then depositors get attracted and take the decision to part with their gold items.

• Another thing is that people may be asked by the banks for proof of ownership of gold which is next to impossible in India because In India gold keeps on transferring from one generation to another. This fact may again opt out people from entering the scheme.

Some points which may attract depositors are:

• Minimum deposit is very less this time i.e. 30 gms.Earlier the govt. of India had tried but it was all in vain because the minimum deposit was as high as 500 gms which is really difficult for an Indian household to spare.

• If interest rates are pretty high then only it would act as an attraction to the depositors. Earlier a similar scheme in 1999 failed because the interest rate offered was as low as 0.75%-1%.

• Tax exemption is another ray of hope which may pull some depositors towards the scheme.

However, the idea to tap the locked gold in Indian household is a wonderful idea and would really create fantastic and outstanding results only if the outline is well bounded and if every norm is made from the middle class people point of view keeping in mind its capacities & capabilities. After one month it has netted only one kilogram out of 20,000 tonnes of privately held gold. So, the scenario is such that people part from their gold, and gets at most 3% rate of return their investment. Depositors may get both the principal and interest in rupees which has been devalued by the government up to 15% per year. But am sure Indian Government will not lose hope. There will be some innovative implications to make the gold monetization scheme fruitful.

This blog is written by Anrita Chatterjee, MBA in Financial Planning (2015-2017) batch.

India, presently inhabiting a huge amount of current account deficit (CAD) in their balance of payment account due to high imports, has finally found a way to diminish it by lowering their gold import bill. Government of India has launched a new scheme called ‘Gold Monetization Scheme’. Under this scheme Indian people have the right to monetize their gold in the bank and earn interest on it. According to a report, Indian households have a stock of 20,000 tons of gold lying with them. The purpose of this scheme is to bring domestically held yellow metal into circulation by encouraging individuals to deposit their stock of gold in melted form in the banks and earn interest on it.This scheme would facilitate an investor having a minimum investment of 30 grams of gold with (beneficial for low income group) in their gold saving account, with minimum Tenure of 1 year. The interest earned on the deposits is tax free. Even the capital gains that arise from trading or redemption of these deposits are exempt from tax. When a customer brings gold to the certified purity testing center or bank, the center will determine the exact purity and quantity of gold and the determined quantity will be credited to the customer gold savings account. Customer will be asked to complete KYC (know-your-customer) process. The deposited gold will be lent to jewelers by banks at a slightly higher rate. This interest rate difference would be profit for the banks. The procedure under the scheme is as follows:

1. Individual will be required to visit the purity testing Center to test the quality of pure gold. After that a customer is needed to fill a bank form and give his consent of melting.
2. The impurities will be removed from the gold to get the net weight of jewelry (gold only). It is then melted. If customer is not happy with the process, then he can ask for his melted gold back but he has to pay a fee to the Center.
3. Fee includes the testing charge which may amount up to Rs.300 and melting charges Rs.500 up to 100gms of jewelry. (melting charges will vary according to different size of jewelry).
4. Agreed customers have no need to pay the fee as bank will pay the fee on their behalf. The collection center will issue a certificate stating the amount and purity of gold to customers.
5. Based on the certificate, the bank will open the gold saving account and this account will be credited with the amount mentioned in the certificate.
6. The minimum tenure of the certificate is 1 year and can be rolled over with the multiples of one year.
7. Interest rate will be 2.5% to2.5%(depending on tenure) fixed on quantity invested.
8. Let’s say you invested 100gms of melted gold in your gold saving account, after 1 year with 2% of interest the value of gold in your account will be 102gms. Now you have the choice to redeem this value in cash or gold only.

For Example:Notes:

1. Investment amt. At end of year= closing quantity at end*Gold rate at end.
2. Issue price per gram is Assumed price.
3. Final Growth= Ending Investment/Opening Investment.
4. Real Growth= Interest Earned on Quantity Invested.
5. Inflation in gold prices= Closing Gold Rate/ Opening Invested Rate.
6. Nominal Growth= ((1+inflation %)*( 1+Real%)-1).

Experts feel that initially government should focus on investment part of gold (only gold bars and coins) because many households especially women will not be in mood to invest their jewelry in melted form. As people become comfortable they can look for the consumption gold (jewelry) also.

This blog is written by Jatin Aggarwal, Sem III student of MBA (FA), ICoFP Delhi Campus