Details of the Draft Gold Monetization Scheme

by Manshu on May 20, 2015

in Uncategorized

The Finance Ministry published a draft on the Gold Monetization Scheme that the finance minister had spoken about during the recent budget.

The big idea behind gold monetization is that India produces almost no gold and imports massive amounts of it — up to a thousand tons a year — this leads to a big trade deficit, and if there were some way to channelize the idle gold lying with households and temples etc. that would go a long way in helping this hole.

The idea is definitely very good, and I’m sure all of us have jokingly discussed this at one point or the other. The difficulty lies, as it always lies, with the execution.

To that extent, I think the ministry has come out with a good first draft although I think right now this idea is more beneficial to temples etc. than it is to households.

I say that because in order to put your gold to work you have to agree to have it melted, and in general you won’t find many households who are willing to have their gold melted even if it promised them an interest. The interest is not likely to be very high for these schemes, and at one or two percent per year, I just don’t see many families doing that.

Religious institutions however are a different kettle of fish altogether, and I do believe that a lot of them will eventually take a pragmatic stance on this, and monetize their gold. Eventually is the key word here because this has never been tried before and it will take time to gain acceptance of the idea. Most readers will remember the skepticism surrounding gold ETFs in the early days, but now it finds its way in the portfolio of most investors.

For those who are willing to have their gold melted, here is a brief overview of how the process is going to work.

  1. You take your gold to a purity testing center and they will tell you how much pure gold there is in your ornament.
  2. If you agree to go forward, your jewellery will be stripped off studs etc. – anything which is not gold, and then melted down to pure gold.
  3. Now they tell you the purity and weight a second time, and you can either accept that and deposit your gold, or take back the melted bars.
  4. If you accept it and deposit the gold then you will be given a certificate of the purity and quantity of the gold and no fee will be charged for melting. In this case the bank pays the melting fees. You don’t get your gold back in this case.
  5. Next, you take this gold certificate to a bank and they open a Gold Savings Account for you.
  6. Bank pays you interest as well as principal in gold.
  7. You live happily ever after.

The government is going to exempt the interest income as well as any gains in principal from Wealth Tax, Capital Gains as well as Income Tax. So, to that extent, the tax angle on this is extremely good.

The process described in the draft document shows that it will take you about a couple of days to do this and the cost will be about a thousand rupees or so. Right now, there aren’t those many centers and of course you have to wait and see how many banks open this kind of account. The other big variable is the interest rate, and how much interest can the bank really gives out on these type of deposits.

I don’t think this scheme is going to be very popular with households in its current form, not unless the rate of interest is very appealing, but I do believe it is a great first step in what could really put to work tons of gold lying idle in India’s religious institutions.

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