'Path breaking, timely, thoughtful': Why experts are kicked about new gold schemes

The cabinet on Wednesday cleared two gold schemes aimed at reducing the country’s import bill and reigning in the current account deficit. The schemes are expected to wean consumers from buying physical gold and encourage them to invest in paper gold instead. Here are the key facts you need to know about the schemes: [caption id=“attachment_2427980” align=“alignleft” width=“380”]  Reuters[/caption] The schemes The gold monetisation scheme will allow consumers to despot gold held in any form with banks for a period of one to 15 years that will earn interest while redemption will be at the prevailing value at the end of the tenure. The scheme is aimed at getting part of an estimated 20,000 tonnes of idle gold into the banking system and issuing sovereign bonds as an alternative to the precious metal. Sovereign gold bonds are aimed at people buying the precious metal as an investment. Such bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment. Finer details Individuals and institutions can deposit as low as 30 gm in the deposit scheme. They enjoy the same tax treatment as was accorded to Gold Deposit Scheme of 1999. The government has made it clear that there will be no dilution in know your customer (KYC) norms and gold depositors will have to make full disclosures on the source of the precious metal. The scheme also incentivises banks as they are allowed to sell the gold deposited with them to jewellers. This will boost domestic supply and cut the country’s reliance on imports. As far as gold bonds are concerned, the limit for an individual’s investment is 500 grams a year. The bonds will be offered to only Indian citizens and institutions, and they can be traded on the exchanges to allow early exit for investors. The government is planning to exempt capital gains that will be made at the time of redemption. These are likely to be launched soon. Gold reserve fund to manage price fluctuations The government proposes to create a gold reserve fund. “The benefit to the government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund,” the press release said. The bonds will be part of the government’s borrowing programme. How the gold deposit scheme works A person with minimum of 30 grams can go to any of the 331 designated centres to test his gold and deposit it – against which a certificate will be issued. The gold can be in any form, bullion or jewellery, and a savings account will be opened. With the certificate, an account akin to a fixed deposit scheme can be opened, bearing an interest. Redemption of short-term deposit can be done in cash or gold – but not in the jewellery form in which it was originally deposited – and for medium- and long-term options, it can only be in cash. The gold so collected will be sent to refiners. A parallel gold loan scheme will operate, wherein a jeweller can get the metal on loan for a short period. The gold can also be used for auctions, issuing coins, and to shore up the central bank`s gold reserves. Tax exemption will come with it. What experts are saying Shekhar Bhandari, senior executive vice president and business head – global transaction banking and precious metals at Kotak Mahindra Bank, has termed the Schemes “path breaking steps to manage Current Account Deficit”. According to him, introduction of Gold Reserve Fund will ensure balanced monitoring and proper control. “Sovereign Gold Bonds will help in reducing the investment demand (approx. 250 tonnes per annum) for physical gold. Right denominations to reach the grass root level and proper distribution would make it a huge success. The Gold Monetisation Scheme will help in mobilising small part of 20,000 tonnes gold with Indian households. The industry is also fructifying Prime Minister Modi’s initiative of “Make in India” by refining 30 tonnes gold dore bars every month (raw material for refining gold),” he said. Somasundaram PR, managing director - India, World Gold Council, concurs with Bhandari’s view. According to Somasundaram, quoted in a report in the Mint, the steps will make “gold an integral part of the larger financial system and a fungible asset class in its own right”. He expects the monetisation scheme to drive recycling and enhance transparency. As far as gold bond scheme is concerned, permitting to sell or trade them on commodity exchanges and to use them as collateral for loans “are very thoughtful and timely.” With input from agencies