ESSAY FOR SBI PO - GOLD MONETIZATION SCHEME

GOLD MONETIZATION SCHEME

Finance Ministry is encouraging and incentivising high net worth investors to park their physical gold holdings with banks and earn interest on that. Finance Minister Arun Jaitely in his Budget speech had announced 2 new schemes -Gold Monetization Scheme and the Gold Bond Scheme - both with an intention to monetize physical holdings of gold and also to curb flow of unaccounted money for gold purchases.

Meaning and the advantages of both the schemes is discussed below.

The so-called gold monetization scheme is a good idea to reduce gold imports and deploy India’s huge domestic stocks to meet fresh demand for the yellow metal. Under the Gold Monetization depositors will be able to park their physical gold with banks, except jewellery, and returns will accrue in their account in the form of physical gold. These schemes are expected to work similarly to bank accounts. Like in banks people periodically deposit money in their accounts and receive interest from the bank. The bank uses these deposits to make loans to others and receives interest in return. The difference between the interest paid and received is the bank’s income. Similarly, under the scheme, households and jewelers will be able to place their gold holdings in a metal deposit with a bank. The bank will pay interest for this. It will lend this gold to jewelers who require gold for their daily working and receive interest in return. The difference between the two interests will be the bank’s income. And you can anytime withdraw your gold in times of need.

The gold monetization scheme has two major benefits . First, it will reduce the dependence on imported gold. India is the world’s largest consumer of gold but has to import about 97% of its annual gold demand. This is a drain on its forex reserves, and is a key reason why the rupee value falls. Second is there is approximately 20,000 tons of gold that is unproductively stashed away in household locker. The scheme intends to circulate this stashed gold in the economy by pulling it out of domestic safes and lending it to those who need it. This will save the country billions of dollars of gold imports annually. 

The other initiative is a new Sovereign Gold Bond which would enable investors to trade in gold without having to buy it physically. The gold bond will work just like a regular coupon bearing bond that the government issues to borrow money for various purposes. The government receives money from investors, who invest in the bond, and pays a fixed periodic interest known as coupon on it. On maturity, it returns the money to the investors. Similarly, in a gold bond, investors, such as households, will be able to lend money to the government by investing in a bond whose price will be based on the price of a fixed quantity of gold. On this, they will periodically receive a coupon (1.5-2% according to estimates). On maturity or sale of the bond, the bond holder will receive an amount equal to the value of the underlying amount of gold as on that date. Therefore, they will get the same return as buying gold bars or coins and selling them later, when their price increases.

The benefit of this scheme is that it will remove the need to import gold for investment purposes. At present, when people buy gold as an investment, it has to be imported from outside. This leads to an outflow of forex and increases India’s current account deficit. With the introduction of this bond, the entire transaction will take place in cash, removing the need for buying imported gold.