Another gold hunt

The Centre’s proposed gold monetisation scheme is superior in some ways to existing ones for mobilising the yellow metal. The new scheme lowers the minimum gold that can be deposited — from 500 grams to 30 grams — thereby widening its appeal. Ideally, there should have been no prescribed minimum, but given that banks will incur transaction costs, this is a workable mid-path. Processing time has been reduced from around three months to just a few hours and the tax incentives in the existing schemes have been retained. The scheme attempts to achieve a dual objective — helping those with idle gold in family vaults earn some tax-free interest and meeting the insatiable demand for gold from jewellers.

But there are some factors that may prevent the new scheme from becoming a big success. One, those with inherited gold jewellery, which means most Indians, are too attached to part with it, even for an interest. Since the monetised gold is lent to jewellers, all deposits have to be melted down and converted into a purer form (standard 99.5 purity). Another drawback in the scheme is that it does not meet the needs of those who sell gold to raise funds for exigencies. Currently, this class of people turn to small jewellers who buy at below the market rates. The Centre could launch an ancillary scheme to buy gold from those wishing to sell it, thus bringing more gold into circulation.

The draft proposal follows the suggestion of the KUB Rao Committee report in letting banks decide the interest rate to be offered. It is imperative that the rate is attractive, at least 3 per cent per annum, to persuade customers to part with their gold. The centres that test gold purity, a process that is required to open a deposit account, should be made accessible. Today, there are only 350 such centres. Since most of them are in the metros, it will be difficult for those in rural areas to avail themselves of this scheme. With around 65 per cent of the gold stock in rural India, the reach of the project will be limited unless more testing centres are set up. But the real test of this scheme — and perhaps any gold monetisation scheme — will lie in assuring depositors that they will not be harassed by income tax queries about how they came by the gold. The bald, if somewhat unpalatable, truth is that the Centre will have to shut its eyes to the source of funds used to purchase deposited gold if it wants to make the scheme a success. Like it has done for the Kisan Vikas Patrika scheme, the Centre could consider scrapping the KYC requirement altogether. Such an approach may not be a great advertisement for a government that is ostensibly committed to eradicating black money. But the truth is, gold is largely unaccounted and if the Centre wants the scheme to succeed, it has to find a suitable way of making it work.

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