For a vast majority of Indians, gold is the preferred instrument of saving/investment. And, this is true not only for high-income individuals but also the poor. Gold can be bought for small amounts and accumulated over a period of time in the form of jewellery, coins or bars, and passed on through generations.
A vast majority of individual investors buy gold in form of jewellery and keep them in bank lockers. They deploy it for purposes like buying a house or meeting hospital expenses or any other emergency requirements.
Why the earlier model failed
Similar schemes were launched during 1998-99 and failed miserably due to the following reasons: (a) the minimum deposit was 500 gram; (b) the scheme was mainly focused on bigger temple trusts’ holdings; and (c) it ignored gold holdings of households. The previous scheme, as a result, was able to mobilise just 20 tonne of gold over 15 years.
Lessons to be learnt
Learning from past failures, the new model could reduce the minimum deposit of gold required to 50 gm to target households. Indian households roughly hold 25,000 tonne of gold, which means there is a huge untapped potential there.
Accordingly, gold deposits up to 50 gm may also be exempted from the requirement of declaring PAN.
This account could be an add-on to existing savings or fixed deposit accounts. To assure prospective investors, the purity verification process could be conducted by the banks via an international accredited laboratory, such as the London Bullion Market Association, or by a government-supported one.
It’s also important to keep paperwork at the minimum as well as provide a nomination facility.
Further, interest on these accounts could be credited in the form of gold. To make the scheme a success, banks would also need to spread awareness about it.
On the lender side, as an incentive, banks may be given an option of using some of the gold deposited into their accounts to meet domestic currency reserve requirements.
Expected interest rate
The return on these accounts could be in the range of 2% to 3%. Of course, fixing such a rate would need to take into consideration the cost to bankers, such as costs of assaying, refining, logistics, etc. Similar schemes in other countries like, say, Turkey offer interest on the same lines.
Gold coins, bonds
The government also proposes to introduce an Indian Gold Coin, which will carry the Ashok Chakra on its face. This may help reduce the demand for coins minted outside India and could become a symbol of patriotism as well. At the same time, this could help recycle the gold available in the country. But the counter-view is that banks do sell gold coins in a similar manner and, as such, a radical change in investment pattern is not envisaged immediately.
The government also proposes to come out with sovereign gold bonds, bearing a fixed rate of interest. The amount generated by the government through the gold bond will help build infrastructure, which, in turn, will provide employment opportunities and increase the disposable income of people. Interestingly, those going in for these bonds will be able to redeem their investment at the face value of the metal on that day.
With the government keen on cashing in on the gold demand in the country, this could be an ideal opportunity to go in for the gold monetisation scheme, after conducting a cost-benefit analysis. The scheme will help convert the physical asset into a liquid financial asset over a period of time, if implemented properly.
What govt can do to make gold monetisation scheme a success
* The new model could reduce the minimum deposit of gold required to 50 gm to target households
* Gold deposits up to 50 gm may also be exempted from the requirement of declaring PAN
* To assure prospective investors, the purity verification process could be conducted by banks via an international accredited laboratory, such as the London Bullion Market Association, or by a government-supported one
* It’s also important to keep paperwork at the minimum as well as provide a nomination facility.
* Interest on these accounts could be credited in the form of gold. To make the scheme a success, banks would also need to spread awareness about it
* Gold deposits up to 50 gm may also be exempted from the requirement of declaring PAN
* To assure prospective investors, the purity verification process could be conducted by banks via an international accredited laboratory, such as the London Bullion Market Association, or by a government-supported one
* It’s also important to keep paperwork at the minimum as well as provide a nomination facility.
* Interest on these accounts could be credited in the form of gold. To make the scheme a success, banks would also need to spread awareness about it
The writer is associate professor of finance and accounting, IIM Shillong
1 comments:
Post a Comment