The Gold ‘Mould’ to BOP (101): GMS 2015

After energy (crude oil), India’s largest imports comprise of Gold, categorized as a non- essential item. In 2009-10 and 2012-13, 30% of the India’s trade deficit was due to Gold imports. In 2013, Indian demand for Gold accounted for around 25% (third highest) of the world demand for Gold. Nearly 95% of the sub continent’s demand for the yellow metal is met by imports. Scholars have estimated that a current account deficit of 2.5%-3% of Gross Domestic Product (GDP) is sustainable for India. However, in 2013, India’s current account deficit had reached a whopping 6.7% of the GDP, the main reason attributed to Gold imports. As of October 2015, India had surpassed China to become the biggest Gold consumer in the world.

The above statistics illustrate that India’s thirst for the precious metal demonstrates tremendous potential. The BJP led government wants to exploit this opportunity to convert the idle Gold lying in lockers into a ‘productive asset’ by monetizing the same through the ‘Gold Monetization Scheme’ launched in September 2015. The main motive of the government is to curb India’s dependence on Gold imports. This would enable them to contain the current account deficits, which are otherwise adversely affected. The crux of this scheme is fairly simple. It aims to re-circulate the existing Gold reserves in the economy among the 2 kinds (very broadly) of demand for the metal: investor demand motivated by capital gains and consumer demand for jewellery along with technical uses in machinery and equipment by firms. This will promote self- reliance replacing the extreme dependence on foreign supplies of the metal.

 

The Mechanism

GMS 2015 flowchart

The fundamentals of this mechanism can be broken down in two parts. Firstly, consumers transfer all of their idle reserves of Gold (in any physical form including bars, coin and jewellery) to the designated commercial banks. They will receive an interest on these deposits. Secondly, banks can loan out these Gold deposits to jewellers who would in turn pay an interest higher than the banks must pay to the depositors. This would facilitate a formal link between the domestic Gold depositors and borrowers, thereby limiting the international involvement.

The tedious process involves the customer, the bank, a Purity Testing Centre and a Refinery. The customer must submit the stock of Gold to a Purity Testing Centre in order to receive a certificate which specifies the amount and purity of the metal. This certificate is presented to the designated bank so as to credit the corresponding quantity of Gold to the customer’s ‘Gold Savings Account’. Subsequently, the customer starts receiving interest within 30-60 days of receiving the certificate. The bank can choose to store the reserves of this precious metal all by itself or use the services of a refiner’s warehouse.

According to the guidelines of the scheme, the interest is calculated on the physical quantity of the Gold deposited and not on its monetary worth. For instance, if 100g is the amount of Gold deposited then 2.5% of 100g yields 2.5g of the metal.

At the maturity of the deposit, the customer has an option of receiving the Gold deposited along with the returns in monetary terms at prevailing rates, or in form of physical Gold bars. This must be specified by the customer at the time of the deposit.

Contingent on their needs, customers can choose from the three kinds of deposits varying with respect to the tenure: Short Term Bank Deposits (STBD) which last for one to three years; Medium and Long Term Government Deposit (MLTGD) ranging from five to seven years and twelve to fifteen years, respectively.

 

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