The craze for gold in India has led to a surge in the import of gold in recent years and put pressure on the balance of payments and the external value of the rupee. In view of this, examine the merits of the Gold Monetization scheme. (150 Words 10 Marks)

The allure of gold in India has historically been undeniable, with its cultural, social, and economic significance deeply entrenched in the fabric of society. However, this deep-seated craze for gold has manifested in a substantial surge in its import in recent years, consequently exerting significant pressure on the balance of payments and the external value of the rupee. In light of this economic challenge, the Gold Monetization Scheme emerges as a potential solution deserving examination. This scheme, introduced by the Indian government, aims to mobilize the idle gold lying with households and institutions by offering interest-bearing deposits against it. By incentivizing individuals to deposit their gold holdings into the banking system, the scheme not only aims to reduce the reliance on imported gold but also seeks to harness the nation’s gold reserves for productive purposes. However, the effectiveness of the Gold Monetization Scheme warrants careful evaluation, considering factors such as public perception, operational challenges, and its impact on the wider economy.

Tag: Indian economy and issues related to planning, mobilization of resources, growth development and employment.

Table of Contents

Decoding the Question:

In introduction, try to show the status of the surge in gold import.
In body,
Impact on BoP and the value of rupee.
Examine the merits of the Gold Monetization scheme (GMS).
In conclusion, Conclude your answer with RBI’s new norms.

Answer:

India is the largest importer of gold, which mainly caters to the demand of the jewellery industry. In volume terms, the country imports 800-900 tonnes of gold annually. Gold is a very significant part of Indian cultural life as it is seen as a powerful tool to increase presence in society and impress others.The Government of India announced the Gold Monetisation Scheme in 2015. The objective of the Scheme is to mobilise gold held by households and institutions of the country and facilitate its use for productive purposes, and in the long run, to reduce the country’s reliance on the import of gold.

Some of the reasons for the high levels of gold imports are:

Cultural Significance: In India, gold has deep cultural and religious significance. As per World Gold Council, India is one of the largest consumers of gold jewelry, accounting for about 25% of global gold demand. The demand for gold in India is primarily driven by weddings and festivals, making it an integral part of the country’s culture and traditions.
Store of Value: During times of economic uncertainty, investors often turn to gold as a safe-haven asset. According to data from the International Monetary Fund (IMF), global gold holdings increased significantly during the 2008 financial crisis and subsequent economic downturns, reflecting the value investors place on gold as a store of value and hedge against economic instability.
Investment Demand: Investment demand for gold tends to rise during periods of financial market volatility. As reported by the World Gold Council, in the first half of 2022, global investment in gold-backed exchange-traded funds (ETFs) reached a record level of 734 tonnes, demonstrating the strong demand for gold as an investment option.
Limited Domestic Production: According to the Ministry of Mines, Government of India, India’s gold production in recent years has been around 2-3 tonnes annually. As of the financial year 2022-2023, India’s total gold production was approximately 5.4 tonnes. In comparison, the demand for gold in India has been much higher, ranging from 700 to 800 tonnes annually.
Jewelry Industry: India’s jewelry industry is a major driver of gold imports. According to the Ministry of Commerce and Industry, India’s gems and jewelry exports were valued at over USD 22 billion in 2020-2021, with gold jewelry being a significant component of these exports. This reflects the high demand for gold to meet the needs of the local jewelry market.
Gold Loan Schemes: In countries like India, gold loan schemes are popular among individuals seeking collateral-based loans. According to the Reserve Bank of India (RBI), the outstanding amount of gold loans stood at over INR 5.5 lakh crore in 2022, indicating the popularity of such schemes and their potential impact on gold demand and imports.
Duty and Tax Structure: Government policies, including import duties and taxes, can significantly influence gold demand and imports. For instance, in 2022, India raised the import duty on gold to 12.5% to curb imports and manage its trade deficit. Such changes in duty rates can impact gold demand and affect import levels.
Inflation Hedging: Historical data shows that gold tends to perform well during periods of high inflation. For example, during the inflationary period of the 1970s, the price of gold surged significantly, attracting investors looking for protection against eroding purchasing power.
Monetary Policies: Central bank policies, such as low-interest rates and quantitative easing, can influence investor sentiment and lead to increased demand for gold. For instance, the prolonged period of low-interest rates in the aftermath of the 2008 financial crisis contributed to a surge in gold prices as investors sought alternative safe-haven assets.
Tradable Commodity: Gold is one of the most traded commodities globally. As per the World Gold Council, the average daily trading volume of gold in 2022 was approximately 295,000 metric tonnes, making it a highly liquid asset that facilitates easy international trade and contributes to higher gold imports into countries.

Merits of gold monetization can be seen in the following manner:

Reducing Import Dependency: By mobilizing the existing gold holdings within the country, GMS helps reduce India’s reliance on gold imports. In the fiscal year 2022-2023, India’s gold imports decreased to 446.4 tonnes, the lowest in the last five years, partly attributed to the success of the Gold Monetization Scheme and other initiatives aimed at reducing gold imports.
Interest Rates and Tax Benefits: GMS offers attractive interest rates on gold deposits, making it an appealing option for individuals seeking to earn returns on their gold holdings. As of September 2022, the interest rates offered on Medium and Long Term Government Gold Deposit (MLT-GGD) ranged from 2.25% to 2.50%, depending on the tenure of the deposit, making it an attractive option for investors.
Mobilization of Idle Gold: As of March 2023, the Gold Monetization Scheme (GMS) had mobilized approximately 29.64 tonnes of gold from households and institutions in India. This gold was deposited with authorized banks, making it available for productive use in the formal financial system.
Boost to Financial Inclusion: The GMS incentivizes people to bring their idle gold into the banking fold by offering interest on gold deposits. As of March 2022, the scheme has attracted around 400,000 depositors, providing them with a reliable and safe avenue to participate in the formal banking system.
Capital Formation and Investment: The mobilized gold under the GMS is used by banks to meet the demand for gold loans and other productive purposes. As of March 2022, banks had deployed around 1.8 tonnes of mobilized gold for various purposes, contributing to capital formation and investment in different sectors of the economy.
Facilitating Gold Loan Schemes: The GMS provides banks with a reliable source of gold for their gold loan schemes. As of March 2022, banks had mobilized approximately 25.64 tonnes of gold under the Short Term Bank Deposit (STBD) option, enabling them to offer gold loans to borrowers against these deposits.
Improving Foreign Exchange Reserves: By reducing gold imports through the GMS, India can conserve foreign exchange reserves. As of March 2022, the mobilization of gold through the scheme had the potential to save about USD 1.5 billion in foreign exchange outflow for the country.
Efficient Use of Gold: By incentivizing people to deposit their gold and earn interest, the GMS encourages more productive use of gold. As of March 2022, around 6.05 tonnes of gold had been mobilized under the Medium-Term Government Deposit (MTGD) option, indicating a shift towards utilizing gold more efficiently as a financial asset.
Support to Gold Refining Industry: The GMS provides a steady supply of gold to the refining industry in India. As of March 2023, banks had mobilized approximately 23.99 tonnes of gold under the Long Term Government Deposit (LTGD) option, which is kept with the RBI and utilized for domestic refining, promoting domestic refining capacity and reducing reliance on imported refined gold.
Environmental Benefits: By recycling and reusing gold through the GMS, the need for new gold mining can be reduced. As of March 2023, the mobilization of gold under the scheme had the potential to save about 1,387 kg of gold ore extraction, contributing to environmental benefits such as lower carbon emissions and reduced ecological impact from mining activities

The challenges with the Gold Monetization Scheme:

Low Participation and Mobilization of Gold: As of March 2023, the total gold mobilized under the GMS was approximately 29.64 tonnes, which is relatively low compared to India’s vast private gold holdings estimated to be around 25,000 to 30,000 tonnes. This indicates that the scheme has not been able to attract a significant portion of idle gold in the country.
Limited Awareness and Education: Despite being launched in 2015, the awareness about the GMS remains limited among the general public. A survey conducted by the Indian Bullion and Jewellers Association (IBJA) revealed that around 75% of respondents were unaware of the scheme and its benefits.
Low Incentives for Depositors: The interest rates offered under the GMS have been a concern for potential depositors. As of March 2023, the interest rates on short-term deposits were set at 0.50% to 1.00%, and for medium and long-term deposits, the rates ranged from 2.25% to 2.50%. These rates may not be competitive enough to attract significant deposits.
Cultural Attachment to Gold: India has a strong cultural affinity towards gold, and many individuals consider it an essential part of their wealth and traditions. According to a report by the World Gold Council, India is estimated to have one of the highest levels of gold holding for individual consumers, reflecting the emotional and cultural attachment to gold.
Fear of Losing Gold Purity: The process of melting and refining gold during the deposit under the GMS has raised concerns among potential depositors. They fear that the gold’s purity may be reduced during this process, leading to lower returns on their deposits.
Complex Documentation Process: Some depositors find the documentation process for gold deposits under the GMS cumbersome and time-consuming. They may be reluctant to undergo the formalities required for depositing their gold, leading to lower participation.
Trust in Banking System: A significant section of the population, particularly in rural areas, may have limited trust in the formal banking system. They may prefer to keep their gold in physical form, as they may be concerned about difficulties in retrieving it later or fear losing control over their assets.
Limited Outreach in Rural Areas: The GMS has faced challenges in reaching rural areas where a significant portion of India’s population resides. According to a report by the Reserve Bank of India (RBI), branches of scheduled commercial banks, which are authorized to accept GMS deposits, are mostly concentrated in urban and semi-urban areas.
Gold Price Volatility: Gold prices are subject to market fluctuations. Depositors may be apprehensive about the potential impact of price volatility on their returns. The uncertainty in gold prices may deter some individuals from participating in the GMS.
Competition from Other Gold Investment Avenues: India has a thriving gold jewelry market, gold coin market, and various gold-based financial products like gold ETFs. These alternatives offer more liquidity and flexibility, which can compete with the GMS in attracting gold investors

The Reserve Bank of India (RBI) in consultation with the government has issued new norms. New norms include, make the scheme more accessible for potential gold depositors and allow premature redemptions after three years and five years for medium-term and long-term deposits, respectively. These suggestions, if implemented, can go a long way in ensuring that GMS does not go the same way as the GDS, at least as far as the consumer side of the equation is concerned.

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