Here's how the gold mobilization scheme is likely to work according to the draft guidelines:
1) The scheme is meant to mobilize gold held by domestic households and institutions. Gold collected through the scheme will be made available to jewelers for manufacturing of new jewellery and other items.
2) The scheme will initially be launched at a few places because the government will have to first set-up infrastructure for facilitating easy and secure handling of gold.
3) Gold collected from consumers will first be cleaned and measured at test centres; it would then be melted to test for purity. After the tests, consumers can either deposit the gold for a fee or take it back after paying a nominal fee.
4) The minimum quantity of gold that a customer can bring is proposed to be set at 30 grams.
5) Those willing to deposit the gold will be given a certificate mentioning the amount and purity of the deposited gold. Banks will open a 'Gold Savings Account' on the basis of such certificates.
6) Consumers will be paid interest on their gold savings account after 30/60 days of account opening. The amount of interest rate to be given is proposed to be left to the banks to decide.
7) Both principal and interest will be paid to the depositors of gold, will be 'valued' in gold. For example if a customer deposits 100 gms of gold and gets 1 per cent interest, then, on maturity he has a credit of 101 gms.
8) The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself (that is, at the time of making the deposit).
9) The tenure of the deposit will be minimum 1 year and in multiples of one year. Like a fixed deposit, breaking of locking period will be allowed.
10) Gold savings account will be exempt from capital gains tax, wealth tax and income tax.
What are the benefits of GMS for end users?
For depositors, Gold Monetization Scheme intends to provide two benefits:
•As low as 30 grams of gold can be deposited.
•There will be no income tax, wealth tax or capital gains tax levied on the Gold Deposit Accounts.
How do the banks intend to utilize the accumulated gold?
There are several ways in which the bank can utilize the gold reserves:
•Lending to Jewelers: Banks can lend the metal to jewelers and earn interest on that lending. Additionally, lending the gold to jewelers will help reduce the total gold import. As import bills are dragged down, the Current Account Deficit (CAD) of government will be reduced. CAD occurs when total value of imported services and good is greater than total value of exported services and goods. CAD means that the country is using international financial aid to operate. This is a liability and eventually needs repayment. So, excessive CAD is bad and reducing CAD is good for economy.
•Invite Foreign Currency Inflow: Banks can actually sell the gold reserves to other countries and invite Foreign Currency in country, not in form of a debt but in form of earnings. A steady reserve of foreign exchanges will help to stabilize Indian currency value and hence, make it stronger against other currencies of the world.
•Use Gold to Meet CRR and SLR Requirements: CRR or Cash Reserve Ratio and SLR or Statutory Liquid Ratio are two basic requirements that banks need to fulfill in order to stay operational. These are actually cash reserves that banks need to maintain with RBI to deal with sudden liquidity mismatch and prevent bankruptcy. It has been proposed that banks be allowed to maintain CRR and SLR using the mobilized gold. This will allow banks to circulate more money in economy, which will provide the much needed impetus for economic growth.
What are the problems with Gold Monetization Scheme?
Here are some of the problems as pointed out by experts:
•The affinity for gold among Indians is not because of the monetary value it holds. It is purely cultural and emotional. Indians will be reluctant to see their valued gold melted and lent or sold. Particularly in South India, gold jewelries are heirlooms. This is going to be a major trouble.
•A person depositing the gold possessed as heirloom will not have proper documents to prove that the gold belong to him or her. This is where black money and white money comes into play. Some may produce legitimately owned gold. Others may present illegally acquired gold. There will be no way to tell the difference in absence of proper document. Thus, government will actually open up a way for frauds to convert their black wealth into white money.
•Banks are free to offer the interest rate for gold deposit to the depositors and banks propose 1 to 2%. This is too low a rate to give people a good reason to give up their assets they are emotionally and culturally attached with.
•Banks intend to pay interest to depositors in gold and earn interest from jewelers/borrowers in cash. Earning in cash and paying in gold creates the risk of significant mismatch that may eventually lead to catastrophic results.
•International Basel norms may not permit the banks to make CRR and SLR deposits in gold and RBI isn’t much comfortable with the idea of gold deposits for CRR. This is because CRR is meant for dealing with liquidity mismatch and using gold as CRR will lead to extreme volatility because of gold prices changing continuously. There may be instances when drop in gold prices may lead to drop in CRR. The minimum CRR requirement is 4% and RBI is not very keen on risking this.
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