Gold bonds are a clear winner but high chances of deposit scheme becoming a flop show

The gold bond scheme finalised by the government on Wednesday is a clear winner since the idea of issuing gold bonds can absorb a major part of the gold investment demand in the country.

Presently, an estimated 300 tonnes of physical bars and coins are purchased every year for investment-purpose in India. Most of this comes through imports. Under the new scheme, investors can park money in papers, which will be backed by gold.

The gold bond scheme permits buying bonds worth 500 grams of gold per year. RBI will issue bonds on behalf of government. Someone who invests in gold bars and bullions purely for investment purpose wouldn’t mind buying those papers. They can also take loans against these papers and trade these papers.

 Gold bonds are a clear winner but high chances of deposit scheme becoming a flop show


But, the government will find it difficult to pull off the second one -- the gold monetization scheme -- unless the banks and the government decide to offer attractive returns. Under the moentisation scheme, the customer gets his gold ornaments melted and purity assessed from one of the recognised centres. This gold is later passed to banks against which a certificate is issued. On maturity, the customer can redeem the gold value with a small interest.

The government targets an estimated 20,000 tonnes of unused gold lying in Indian households and temples. It wants to use this stock productively in the domestic market and thus curb imports. India is the largest gold importer in the world.

Not many people would want to see her long-preserved, family-inherited, emotionally attached, piece of yellow metal lose its identity and ‘feel’ by melting it, for meagre returns. As per the guidelines, the interest rate on shorter-tenure gold deposits will be left to the banks, on the basis of prevailing international lease rates and other costs, while for the medium to long term, the rate of interest will be decided by the government in consultation with the RBI.

No one would settle for lower rate of interest currently being discussed (as low as 1 percent). Instead of earning such low returns, they would rather prefer to keep the ornaments in the bank locker. Given the cultural and traditional affinity of Indians to their family-owned gold ornaments, the only incentive for them to come forward and pledge their gold under the scheme is higher returns. Thus, the success of this scheme depends on the rate of interest offered.

One must remember that the gold monetisation scheme has existed in India for a long period. For instance, State Bank of India (SBI) has been offering a gold deposit scheme for almost two decades, offering an interest rate of 1 percent. The difference between this scheme and the current gold monetisation scheme is that the minimum quantity of gold that can be deposited in the earlier one was 500 grams, while it has been brought down to 30 grams in the modified scheme to enable households to participate. SBI’s gold scheme hasn’t taken off well as the bank has managed to mobilise only about 8 tonnes so far.

For an average Indian, gold is much more than a avenue for investment.

According to a World Gold Council study, more than half of the gold imported in India is used for wedding purposes (not investment) and a significant chunk to make ornaments. Indians do not easily part with her gold ornaments given to her by parents, unless there is a pressing need.

Many a time, pledging gold is seen as something like a social ignominy. In the past, the government has always been trying out every possible method to cut down the gold consumption of Indian households -- sharply hiking import duties and prodding public return the idle stock of gold lying in domestic households and temples back to circulation.

Dealing with temple trusts is even tougher since the gold lying in temple vaults are guarded by faith, religion and politics. Also, like in the case of Trivandrum Padmanabhaswamy temple, the treasure in temple vaults has tremendous antique value. Seeking this treasure to melt it and offer a certificate in return, might not be a welcome idea to the temple managers.

Yet another big trouble in waiting for the government, while rolling out the gold monetisation scheme, will be checking the inflow of black money through this channel. There is no clarity on this part in the guidelines.

Unlike other assets such as real estate, it is highly difficult to verify the ownership of gold, especially if the gold is old. Those, who have unaccounted wealth stored in the form of gold ornaments and bars, will find this as a golden opportunity to legitimise their ill-gotten wealth. They can split the gold into small instalments and approach banks either by themselves or a benami.

The government can address the problem to a certain extent by making scrutiny tight for gold brought in the form of bars or coins to find out suspicious transactions, but not for household ornaments. Banks can thus track the transaction with sufficient proofs on address and identity. In case, the quantity exceeds a particular limit, even on ornaments, questions can be raised.

Updated Date: Sep 10, 2015 10:48:03 IST