Old ain’t gold

Gold diverts savings from financial assets, costs the exchequer foreign exchange, and is far from a safe investment, given the purity issues associated with jewellery sold in India. The move by the Centre to flag off three gold-related schemes (Gold Monetisation, Sovereign Gold Bond and Gold Coin) on the eve of Diwali is a good first step to wean savers away from the yellow metal. However, given that these are completely new products with a complex structure, they are unlikely to yield quick results. Some modalities may need ironing out though.

Of the three, the Gold Monetisation Scheme is the most critical to the policy objective of reducing the import bill and putting the 20,000 tonnes of gold believed to held by households to productive use. This is certainly more attractively designed for the medium and long-term than the earlier gold deposits scheme, with a lower threshold for deposits (30 grams), the availability of many more tenures (up to 15 years), and interest rates of 2.25-2.5 per cent (against about 1 per cent earlier). Procedures for testing purity and utilisation of the said gold have also been clearly laid out. These features certainly make the Gold Monetisation Scheme financially attractive for savers who own old jewellery and incur safekeeping costs on it. But this, unfortunately, doesn’t guarantee that households will rush to surrender their gold. Even if Indian consumers didn’t nurse such an emotional attachment to their jewellery, the substantial losses they will have to incur when they assay it (most store-bought jewels are of poor caratage), is likely to prove a stumbling block. Here, banks and intermediaries who interface with depositors will have to play a key role in convincing them to participate. Therefore, their buy-in should be secured through monetary incentives. The Sovereign Gold Bond scheme, a 5 to 8 year savings instrument that will allow investors to ‘own’ gold in paper form, while offering both price appreciation and interest of 2.75 per cent, is quite attractive for savers too. But the fixed pricing of the bonds is a deterrent. In both, Gold Monetisation and Gold Bonds, either banks or the Reserve Bank of India will be saddled with the risk of gold price fluctuations in the long run. It is critical they take immediate steps to hedge against it. The Gold Coin scheme, which is supposed to recycle gold sourced from the monetisation effort, will clearly succeed only if the deposits prove a hit. If not, it could actually end up adding to the country’s bullion imports.

The Centre should not cave in to other demands to popularise its new gold products such as offering a tax waiver or relaxing the mandatory KYC requirements. Unless such demands are firmly resisted, these gold products will end up morphing into backdoor amnesty schemes for tax evaders.

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