Will gold monetisation lead to black money conversion?

While the draft policy is silent on source of the gold, it has multiple benefits for all parties involved

In a move to convert gold holdings into a financial product, the government on Tuesday released a draft scheme under which a person or entity can earn interest by depositing the shinning metal with banks.
 
The scheme intends to bring into circulation the gold locked in household and temple trusts. According to the World Gold Council, nearly 22,000 tonnes of gold is lying idle in households and other institutions, with nearly 800-1,000 tonnes added every year. The intention of the scheme is to monetise this gold.
 
The scheme intends to replace the 1999 gold deposit scheme and gold metal loan scheme which had failed to win traction with consumers.  In order to give it mass appeal, the government has drastically cut the minimum quantity of gold that a customer can deposit from 500 gm (or half a kilo) in the earlier scheme to a mere 30 gm. The new model will also continue with earlier schemes’ triple tax exemptions -- Capital Gains Tax, Wealth tax and Income Tax.

 

Not only is the scheme attractive to retailers who will earn back the principal and interest in the form of gold (or cash, as they choose), but banks have also been incentivised and encouraged to take gold as deposits. Banks are allowed to fix their own interest rates on these deposits and the gold mobilised through this scheme can be used to meet the CRR/SLR requirements. This has been a long-standing demand by banks since they are not able to monetise their gold deposits.
 
By allowing banks to use gold for CRR/SLR, government has indirectly fixed a ceiling to the interest rate that the banks will be willing to offer. But banks will be able to free cash from the CRR which was not yielding any returns. Further, banks will be permitted to sell the gold to generate forex reserves, proceeds of which can be used for trade finance. In short, gold locked in banking system will start contributing to the economy.

 
Broking firm Nomura feels that even if the scheme is able to create only 100-200 tonnes in gold deposits every year, over the next few years it could help reduce gold import bill by 10-20 per cent saving $3-6 billion of foreign reserves every year.
 
However, one key area of concern is whether the scheme will be used for converting black money into gold. The draft is silent on verification of the gold holdings. One of the oldest forms of conversion of black money has been as gold. ‘Streedhan’ (money that a woman brings/obtains as gift during her marriage) and ancestral (undisclosed) routes can be used to convert black money.  By using this scheme, such money will enter in the system without being penalised. The only relief is that it will start contributing to the economy.

 
Though the minimum level amount of gold that can be deposited has been reduced, government will have to spell out the maximum that is acceptable without any questions being asked. Though banks will be following the know-your-clients (KYC) norms, clarity will be needed from the government if there are going to be any linkage between amount of gold deposited and known sources of income.
 
Barring this one issue of source, though, the scheme is a step in the right direction. Nomura sums up the gold monetisation scheme well by saying it as an interesting concept for India that could increase the recycling of domestic fold, monetise some physical savings, and to some extent also reduce the dependence on gold import.