This articles builds up on the previous upload titled ‘The Gold ‘Mould’ to BOP (101): GMS 2015′. The reader is requested to go through the same for clarity.
Pros and Cons
The following points highlight the USP of GMS 2015, thereby indicating why this scheme would attract a lot of eligible customers. This would include Resident Indians (Individuals, HUFs, Proprietorship & Partnership firms), Mutual Funds and Temple trusts.
- The depositors enjoy returns on a previously unproductive asset through not just interest but also appreciation of Gold, the odds of which are always favourable in the Indian peninsula.
- A major advantage is that it is a way of generating tax-free income since the returns are exempted from Income tax, Wealth tax and Capital gains tax.
- This would be an attractive scheme for small depositors as it allows deposits to begin from as low as 30g unlike the GMS 1999 version which mandated a minimum quantity of 500g.
- Another plus point of GMS 2015 over GMS 1999 is that the current scheme offers a relatively higher yield ranging from 2.25%-2.5% compared to the previous one, 0.75%-1%. In the erstwhile GMS 1999, the deposits could be made only with the State Bank of India whereas the current scheme has no such restrictions.
- The minimum tenure of the deposit is one year and is therefore similar to a fixed deposit. It has an option of premature withdrawal as well. This ensures an adequately flexible liquidity of the deposits.
- Moreover, the certificate of Gold deposits issued by the bank to the customer can be used as a collateral against rupee loans. Clarifications regarding this policy are still pending.
However, the government must become wary of some potential obstacles to the success of this ambitious scheme. The following bullets highlight a few of them:
- GMS 1999 offered an interest rate of upto 1% whereas GMS 2015 offers upto 2.5%. If this rise of 1.25 percentage points is received a little too overwhelmingly, people might be encouraged to import more Gold instead since it is yielding such a strong return, that too being a tax free source of income which ca be hedged against inflation. This would defeat the very purpose of the scheme to curtail imports.
- Although GMS 2015 appears to be dynamic as it offers an option to redeem the returns in Gold bars or in cash, the socio-cultural significance of Gold in India might act as a deterrent in investing Gold. This is because a piece of jewellery would be ultimately melted into standardised Gold bars and would no longer retain its original design. This could act as an impediment in case of wealthy families where heirlooms hold a sentimental value.
- In case of a liquidity crisis, banks need to develop a Contingency Planning Fund for Gold reserves separately carefully accounting for the number of customers who wish to redeem the Gold in form of bars. This is an extreme situation but considering the volatility in the Gold market it is not entirely avoidable. This is because banks are ultimately dependent on the interest received on Gold loans extended to jewellers.
- Their might be a requirement for flexible guidelines with respect to the ‘Know Your Customer’ forms that Gold depositors have to fill since there might be cases where Gold was procured through informal sources and therefore it did not come with a bill.
- A report by IIM-A states that the Gold imported could be in two forms: Finished form or a Gold Mine Doré (which is then refined to produce Gold). The share of doré in Gold imports has been increasing from 0.02% in 2010-11 to around 8% in 2013-14. The advantage of importing Gold mine doré is that it generates value addition in India. This is due to the fact that refining generates employment and the income thus generated can be taxed by the government (Direct tax). The report states ‘Economic policy should then prefer promotion of the domestic refining industry over imports.’
- An extension of the same report states the need to strengthen the infrastructure for refining and assaying of metals in India. Hence, the report is inclined towards concluding that importing Gold mine doré is preferable to the GMS 2015. ‘This is the ability to assay metals and the associated logistics of moving metals in a secure manner across locations. These are exactly the competencies that banks lacked, due to which there was extremely limited success of erstwhile schemes to mobilise gold for productive purposes in the economy.’
Potential to make a difference
As Indian customs and traditions dictate, the festive season, weddings and any auspicious occasion must invoke the blessings of the almighty. Gold, which symbolises wealth and status, is extensively used in ornaments which adorn the statues of Hindu deities. Gold purchases peak during festivals such as Dhanteras, Dassera, Onam and Durga Pooja.
According to the World Gold Council (India), Indian weddings generate 50% of the annual Gold demand (India). They have estimated that over the next decade, 15 million weddings will take place in India. This substantiates the claims of a booming market for Gold in the ‘Land of Gods and Goddesses’!
The MumbaiMirror reports that the Siddhivinayak temple has decided to deposit 40 kg of its gold reserves under GMS (2015). This is likely to earn the temple nearly Rs 69 lakh in annual interest, calculated at the upper limit of 2.5% rate. Similarly, Tirupati temple had deposited 1800 tonnes of Gold with SBI at 1% interest rate for five years, which means an addition of 12kg Gold per annum. This data regarding Gold deposits by at least 2 among the top 5 wealthiest temples in India marks a major milestone achieved by this scheme.
The World Gold Council estimates that India possesses 22,000 tonnes of idle Gold worth Rs. 62.6 lakh crore in private hands. Considering a hypothetical situation, where all the Gold reserves are jointly deposited in one bank at the rate of 2.5%, it can generate an astounding 550 tonnes of Gold per annum! This has the capacity to turn the tables in terms of the current account deficit that India generates annually! According to Reuters (2015), India’s annual Gold imports of 800-1000 tonnes could be reduced by a quarter if only temples decide to participate in the GMS 2015. Further, it is not difficult to conclude the magnitude of similar results if a vast majority of the idle Gold is invested in this scheme.