Finance Minister Arun Jaitley has proposed a measure that seeks to monetise gold hitherto considered an unproductive asset. The long-standing demand to bring gold with Indian household in circulation, to reduce imports and control the current account deficit, has been accepted. Also, Jaitley has announced sovereign gold bonds and India-made Ashok Chakra-embossed gold coins, to replace the need for import.
The Gold Monetisation Scheme seeks to replace both the present gold deposit, run by those like State Bank of India, and gold loan schemes, under which metal loans are provided by gold-importing banks. While the operational details of the new scheme are yet to be worked out, Jaitley said: The new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal accounts. Banks/other dealers will also be able to monetise this gold. Allowing dealers to moneitise gold is seen as a major boost.
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While the rate of interest and cost of gold loans under the proposed scheme is yet to be known, industry experts fear there will be additional cost, as gold to be monetised will have to be melted first and converted into bars to give as metal loan to jewellers. Currently, imported gold is given as loan and no such cost is incurred. (City of Gold)
Apex industry body, the All-India Gems and Jewellery Trade Federation (GJF), had for the past 18 months been recommending the government introduce such a scheme to unlock domestic gold with individual households. In fact, Indias only bullion refinery certified by the London Bullion Markets Association (LBMA), MMTC Pamp, had proposed a deposit scheme to fetch three-four per cent of annual returns, instead of gold and jewellery lying idle in lockers.
India, one of the worlds largest consumers of gold, imports as much as 800-1000 tonnes each year. Though stocks of gold in India are estimated to be over 20,000 tonnes, this is mostly neither traded nor monetised.
Sudheesh Nambiath, senior analyst (precious metals), GFMS, however, says: There has been a thrust on long-term policy to reduce dependence on imported gold, and some have the infrastructure in place to take this ahead. So, steps like the gold monetisation scheme will be a successful approach a year or two down the line.
Jewellery traders, however, saw the new rule making furnishing Permanent Account Number (PAN) mandatory for all sales and purchases exceeding Rs 1 lakh in value, as a dampener. They said the new limit, much smaller than the current Rs 5 lakh, would likely affect sales.
To encourage individual consumers to deposit gold, the finance minister proposed to issue Sovereign Gold Bonds as an alternative to purchasing/investing in physical gold. To be issued by the central government, these will carry a fixed rate of interest and be redeemable in cash in terms of face value of gold at the time of redemption. The central government will not have to repay in gold at the time of redemption; an amount equivalent to gold will have to repaid and the customer who deposited gold could use the amount to buy physical gold if he so wishes. If the government hedges its gold price risk in sync with the gold bonds, the price risk for such bonds could be avoided.
Jaitley also suggested refiners to work on developing an Indian cold coin carrying the Ashok Chakra. This will help reduce the demand for coins minted outside India and also help recycle gold available in the country. The move will help assess real import of gold in the country and lay more stress on strengthening the attempts to unlock more domestic gold, said Haresh Soni, chairman, GJF.
The scheme, once implemented, will boost domestic gold-refining business, as monetised or deposited gold will be refined and converted into standard bars. Welcoming the move, Rajesh Khosla, managing director of MMTC-PAMP, offered to develop a Gold Coin. He said: As Indias first and only LBMA-accredited refinery for gold and silver, MMTC-PAMP will be keen to partner with the government for this initiative.
Allowing dealers to monetise gold is seen as a good scheme, but may take some time for the required infra to be built
PAN will have to be furnished for sales and purchases above Rs 1 lakh in value
Sovereign gold bond, to be issued by the Centre, is a new financial instrument
- FM has proposed Ashok Chakra-embossed Indian gold coins for physical investment