The scheme to monetize gold is commendable but its implementation is still riddled with many ifs and buts. Unless further fine-tuned, it is highly unlikely that there will be much gold deposited with banks, especially by households. The scheme was announced by Finance Minister Arun Jaitley in the budget speech in February. The objective was to put to productive use enormous quantities of gold lying with households. Banks accepting gold deposits were expected to sell this gold to jewellers, which in turn, was aimed at curbing gold imports. Considering that gold imports account for a huge outgo of foreign exchange, any scheme which can recycle the huge quantities of gold present in the country ought to be welcome. India imports some 8,000 to 1,000 tonnes of gold every year. The forex outgo on gold imports in 2012-13 was $53.8 billion. Indeed, the high current account deficit in that financial year had led the government to slap a higher rate of duty on gold imports. Fears of a spurt in smuggling were raised by the powerful jewellers’ lobby, though the imports came down appreciably. At present, the duty on gold stands at ten per cent. In fact, in the ten years till 2013-14, total imports of gold were worth $280 billion, a substantial amount given that the total foreign exchange reserves now stand at a little above $ 350 billion. Yet, the scheme to monetize gold is unlikely to prove an unqualified success due to several unresolved issues. For one, since much of the gold lies with households in the form of jewellery there will be reluctance to melt the same under normal circumstances. Made-up gold jewellery needs to be melted, purity of gold extracted independently evaluated, and only then will a bank open a gold savings account. Aside from the hassle, the uncertainty about the price of gold at the time of maturity would act as a disincentive for potential depositors. Indeed, private gold deposit companies accept jewellery as collaterals from people in dire need of money but they undertake not to melt or dispose of the same till such time the agreement on repayment of the loan advanced does not expire. Of course, banks cannot do so, and, besides, that is not the objective behind the gold deposit scheme. Banks are expected to sell the deposited gold to jewellers in order to bring down the imports of gold. Also, banks can compete with one another on interest rates on deposited gold. An earlier such scheme had proved a non-starter due to the unattractive deposit rate and fear of the tax authorities. The earlier scheme prescribed a minimum quantity of 500 grams for availing of its benefit; in the new one that has been reduced to 30 grams. Though under the new scheme no questions can be asked as to the source of gold/jewellery sought to be deposited, there still remain a few downsides. One, at the time of purchase of gold a depositor might have paid much less than its prevailing price. Will he be expected to pay a capital gains tax on the increased amount. Such payment even with indexation will act as a disincentive.
Again, depositors need to be reassured that regardless of the quantity of gold/jewellery deposited they will not be hassled by income tax authorities. In the absence of such a categorical commitment not many people might come forward to deposit their gold. A lot will also depend on the rate of interest to be paid on the value of gold. If it is higher than the usual savings bank rate, gold owners might still feel tempted, especially when they stand to lose on the making charges of jewellery. On maturity, an equivalent quantity of gold realized from the melting of jewellery would be returned. Of course, households in need of emergency cash, and distrustful of private money-lenders, might still make use of the scheme. But various temples and trusts sitting on huge quantities of the yellow metal ought to be encouraged to put the same to good use by earning interest on their hoards. Banks, on their part, have an incentive to use the deposited gold as part of the statutory liquidity ratio or cash reserve ratio and thus reduce their obligations on these counts to the central bank. All in all, a well-intentioned scheme whose success would depend on weaning Indians away from their inherited obsession for gold/jewellery and on the degree of enthusiasm shown by the participating banks.
